The iPod Touch is a very strategic product for Apple. Apple is in the process of converting their vast base of 200M legacy iPod users into iPhone and iPad users.
The $199 iPod Touch probably has the tightest margin of any Apple product, creating a stepping stone at the right price point to facilitate the migration. The tight margins may explain why no other company has matched it in the three years it has been on the market.
If Apple ever sells the iPod Touch with the Retinal display for $199 I would seriously consider it a sign of the apocalypse.