The trick to marketing isn't so much a material prowess over your competitors as a conceptual, cultural marketshare. Apple may not hold the mp3-player sphere in the long run - unless you're Coca-Cola, your product has not likely replaced a neurotransmitter in the world's collective brainstem - but for now, Apple unofficially owns the rights to the "stylish luxury music connoisseur" culture module. People who want that will go to the iPod. Even as other players out-gigabyte it, or make ineffective attempts to out-style it (iRiver, Zen Touch), iPod will own its cultureshare until someone absolutely kills it for performance. Which, like you say, would probably be Microsoft. And even then, Apple has fair command of the suave, modern techie market, so it'll be less of a killing than the introduction of competition.
My Mac-obsessed friend and i often exchange bemused verbal blows over his Apple loyalty. i wonder if i will burn in the eighth level of hell for oblique defense of Microsoft.