It's a bit sad that Apple is crippling music phones because they don't want to cannibalise the iPod. One day they'll have to make music phones, because it'll be crazy not to.
Yes, there's the "separates are always better" argument, but that only works when people require the higher standards that separate devices offer. Once you get to a certain point, separates are still better but music phones would be good enough for most people.
Imagine if a far-future music phone had a 100 gigabyte HDD, would people really want a separate iPod just because it had, say, 1000 gigabytes? There's only a finite level of quality that people need, there's only a finite level of storage space that people need, so when music phones reach those levels the market for separates will collapse into a niche.
How many people have separate calculators, or separate FM radios? Very few because built-in versions are good enough for most people in most situations.
I think the holy grail for music phones, the moment when they become a really mainstream device, is when there's a model that has all these things:
-Relatively cheap (under $300)
-Hard disk (at least 4GB, preferably something much larger like 20GB so there's room to build a largeish collection)
-You can buy music straight onto the phone, preferably over the phone network or wi-fi depending on your location, but even wi-fi only might be okay
Leave out any of those three things and you have something that's probably only a niche market. I'm pretty sure one day all those things will be true, because the hardware is getting cheaper on every front. Will bog-standard phones in 2010 have all three things? Maybe.
The last point about Over The Air sales is particularly important.
You'd be able to buy music as soon as it's mentioned in conversation or in a media article, wherever you are. If you end up with a song stuck in your head, you could give in to the torture and buy the original straight away.
You'd also be able to sell tracks directly in advertisements, there could be a magazine advert for a new album which would say at the bottom "Text 123456 to buy it!" or even "Text 654321 to get a free sample track". This already happens with realtones, and people seem prepared to pay exorbitant prices for them, so why not extend it to selling the whole record?
You'd even be able to buy albums through links on the "visual radio" system which many smartphones are getting now. Radio stations would be generating direct revenue, not just indirect advertising, for record companies because the sale would take place directly because of a track being played. Radio stations might become incredibly important to the industry, and the stations could even start taking direct cuts of tracks bought because of links on Visual Radio. That might mean music stations all dumping advertising (which is a good thing), but it would probably also make them play best-selling rather than low-selling or new and untested tracks (which is a bad thing).
I know we're used to just using a phone with a PC, and it's cheaper and quicker than OTA, but there's a few problems with it too: it adds a layer of complexity to the transfer process, it reduces the opportunity for impulse purchases (how else can you buy a song that's been ringing in your head?), and it makes piracy easier (which is very bad for content makers so they're less likely to support it).