Apple cashed in on the right marketing strategy at the right time. MP3 pirating was taking off, and Apple's "Rip, Mix, Burn" slogan played right in to that. They just didn't create the player, they created free software that allowed users to easily catalogue their collections. Storage space was amazing for the time (5 gigs), which was enough to keep most people rocking for days without repetition. Also, being able to use the device as a portable firewire drive fit the needs of mac users (mostly designers in those days) nicely.
Apple continued to improve the device on a regular basis, adding space and cool new features with every release. I've owned several ipods over the years, starting with the 10gig V2. I remember being the only guy on my commute to have one! My most recent ipod, the "Touch", is another brilliant device. However, as an ipod, I think it took a giant step backward. The "external drive" option has been disabled. Adding things like videos from a different computer than your own is impossible. It just seems very prohibitive in what you can do with it. I use my 5g 60 gig ipod video as my traveling device, and the touch as a portable internet & email device at home.