I use the iPod part daily, especially for watching movies. I commute an hour each way by bus and train and I get to watch an episode of something in the morning and something else in the evening. Using iPhone-specific h264 videos, I can get a 45-minute episode (A one-hour US show) down to 200MB in perfectly decent quality. When I get off the train and walk the last bit, something like ENVY, Nine Inch Nails, Mogwai or PJ Harvey will wake me up enough to start a day at work.
I realise that this is just me, but my iPhone has replaced my phone, PSP, book and iPod. When I previously carried a small messenger bag, I now carry a phone.