Why canibalise sales of the iPhone with the iPod touch?

I know that there had been rumours floating about that Apple would introduce a touch screen iPod but I never quite believed that the company would canibalise sales of the iPhone so soon after that product went on sale. And yet Apple's done exactly that.

Now anyone who wanted a device that browses the web and lets them listen to music, watch movies, and show slideshows of their photos can get an iPod touch, why buy an iPhone?

The question is why did people want an iPhone in the first place? Surely it wasn't so they could take advantage of the clever answer phone feature? What other reason is there to get the iPhone now that you can get a iPod that does all that, and carry on using the free phone you got when you signed up for a contract with your mobile phone network?

I might even do that.

(Bet that people in the US who've already bought an iPhone are a bit annoyed, and not just because they can now get the functionality in an iPod, but because the iPhone is now $200 cheaper... But doesn't that always happen?)