It could be, but I've heard this same story told about a Sony exec. instead of Steve, and that was before iPod's time. It was a camera that he dropped into a body of water though. The rest is same.
[^1]: http://forums.dpreview.com/forums/read.asp?forum=1000&me...
Let's not forget that early Apple was modelled after Sony of the time. Also, under the context of Japanese culture the kind of attitude displayed by the 'boss' in the story is less striking or unusual.
That first iPod had a hard disk. Hard disks have disk heads that float on air.
Typical lenses aren't flat at the back; CCDs or films are. You could fill that void with glass with a different index of refraction, but that would only make the thing heavier, not smaller.
Hard disk drives are sealed, you're not going to get much air out of dropping an HDD (especially a 1.8" one) in water.
Even more amusingly, hard drives need that air inside to operate and they won't work at high altitudes.