Why does the Mac Mini sell so slowly (proof lying in the fact that it was only recently upgraded to 64-bit and without announcement due to existing supply)? Because it is not a cost effective entry-level computer, for Apple or for the Consumer. Thus, the market is slim. This is a perfect example of Apple not doing enough market research, thus why they would not think to make a small tower using common components. Also, at that price point, many computers come with a monitor, keyboard, mouse, and speakers.
Another key point from history that proves that Steve hasn't learned from all of his mistakes: In the 80's Steve refused to put a fan in the Mac to aid cooling because it would add noise, making it unappealing. Result: many Macs became big beige plastic toasters, Steve gets kicked out of the company. Cause: The wrong ratio of form over function is a non-existent market. Why doesn't the Mac Mini sell? Because its so small that the computer itself costs more than an entry computer with everything. Cause:
The wrong ratio of form over function is a non-existent market. Why does the iMac sell, then? because it is an OK ratio of form over function because it
does include everything you need.
Given that Steve Jobs has made the same mistake twice,
some twenty years apart, I think it is safe to say that Steve has not learned his lesson, and thus would indeed be likely to ignore a potential market such as a low-cost small- or mid-tower. To be neutral, I neither agree nor refute that a large enough market exists for this product, because it is hard to compare what works for Wintel will work for Apple. However, to counter, I believe that if this market does exist in a large enough scale, that a) it is diminishing rapidly as laptops with their AIO design and dropping prices in addition to their portability take a larger ratio of the industry. They will soon hold over 50% of the market share. b) It would indeed cut in to the iMac sales as it would be a cheaper entry to the Mac platform, though apple has already sort of done this by starting the Mac Book at a lower price than the iMac. Although, I believe Apple once said that their notebooks already outsell their desktops, though I don't remember where I heard it from. c)Given that the majority of the market is not computer savvy enough to upgrade a computer, let alone open it without fear of explosion, they have two options when a computer becomes so obsolete they can't or don't want to use it anymore: 1) they throw it away, sell it, or give it away to family/charity, or 2) they take it to a computer specialist (such as Geek Squad) to upgrade their hardware on a budget to make it sufficient for a somewhat extended period of time.
It's sad but it's true. While many towers will have cards for extended capabilities such as added ports and whatnot, many more come from the factory like that as a base, as do laptops and AIO's. The fact that most people ditch older, still usable computers for newer ones instead of upgrading internals is one of the reasons laptops are becoming more popular. As more and more ignorant people enter the market, they slowly become the majority and outweigh the number of people who need the expandability options of a tower. This limits the market to large companies with IT professionals who could and would actually upgrade computers instead of outright replacing them given the opportunity in an effort to reduce costs. However, since the only major upgrade they would make would be RAM or a harddrive, both being upgradeable for the most part in a laptop (although corporations would use server storage instead of local storage mostly), this once again nullifies the argument of practical upgradeability for the majority of the market.
So far, the only reasons for a smaller tower are a) low cost for both Apple and Consumer (nullified because of the sales it would undermine the iMac and Mac Book, both of which Apple has invested alot of money into developing) b) they are slightly harder to steal, c) less limited upgradeability, and d) to use pre-existing peripherals.
All of B, C, and D are reasons to introduce a budget version of the Mac Pro in mid/full tower form. A small tower would likely require a proprietary or otherwise high-cost motherboard. Despite how much a mini tower can hold, it is still very hard to work with, has limited space, and cooling can be problematic. This eliminates A as a good reason.
Both B and C, along with part of D would be a good reason to make an easy-open iMac with or without mouse and keyboard. With more options for consumer-installed upgrades, this would suit most of you just fine (except those of you who don't like the screen, who would go with the first one).
Other reasons directly against a small tower would be, as mentioned before, development and part costs. Designing a whole new aluminum case (given Apple's current design trends) would also be more expensive to produce even with more standardized larger-scale internals.
To me, I see a niche of users who need affordable upgradeability. The most cost-effective solution for Apple would be to offer a relatively bare system using a Mac Pro tower, an ATX (standard) motherboard, and offer all levels of processors, RAM, harddrives, and disk drives. Or perhaps a steel and plastic version of the case, to keep base costs below $500. This way, you're not just buying your own parts and spending money on non-Apple stuff if they can help it. This plastic and steel regular tower could be called just plain old "Mac." iMac for Integrated Mac, Mac Pro for Professional Mac. Then they should offer some smaller displays. However, this would still take sales away from the iMac. The only reason for the price premium would be for the ease of setup of an AIO.
It would make business sense for Apple to have a lower-priced Tower, but only if they dropped the iMac, because then
it would become a niche market. Frugality dictates "go cheaper of you don't need everything." That's one of the reasons desktop AIO's are more or less exclusive to Apple; they generate the market because iMac the easiest way to Mac OS, except the Mac Book.
Apple makes alot of money on people's ignorance. People buy iPods because they're easy to use and are more common than other players, despite being a middle-of-the-road choice in most cases. For some things, there are better ones out there. Another way is that they overcharge for upgrades. It costs $150 to upgrade from 1 GB to 2GB of RAM (in the Mini, which actually can be opened if you know how)? Try $90 before buyback of the lesser RAM.

Oh, and the iPod Mini, people who don't care about a color screen or size have replaced their own batteries and upgraded the Compact Flash HD with a 16GB unit. That's pretty good savings over a newer, lesser capacity Nano.
If this whole thing sounds contradictory not only to itself but my earlier post, that's because it is. What would sell better and what Apple is willing to sell without becoming contradictory to their pitch of simplicity, are two conflicted ideas. Apple doesn't want to drop the iMac in favor of a mid tower because that would eliminate one of they key points of Mac-iness of the company, not to mention a large business investment in a product that would become completely unnecessary. Not only that, but that market is rapidly shrinking due to laptops, as mentioned earlier. Giving people options means a higher cost of production for each one vs. how much profit it can make. Flat out, Apple doesn't want to invest in something that's going to go away and is not, in their view, in their best interests. Their only option? Drop prices of everything in varying degrees from $100's to $1000's of dollars. But that would ruin their profit margin. Since this is a losing proposition for Apple, it would be best for super-savvy users who know better and have the skills to make their own solution, since it would be a lose-lose situation for Apple to solve it for you. What do you do? Build your own computer with what you really need and use a hack like OSX86, and buy your OS. If certain components don't work, you would have had that problem with an Apple-made tower anyway. The only way to make a less expensive tower that would not compete with the iMac would be to price it in the mid $1000 range or higher. Problem is, a surplus of those exist in the used market already.
Oh, and those of you who still want an attractive design, you should see the selection of cases available online from an e-tailer like Newegg.com.
Q: How many times can one man go in circles contradicting himself and over-explaining/analyzing why something is or is not?
A: As many times as the late Douglas Adams did, except he made it entertaining.

EDIT:
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Use Mac Pro. That's the ticket.
Ok, now you're just being ignorant. The whole point of the statement is that the Mac Pro is
not cost effective for the application. My whole setup costs well less than $700 new, is perfectly sufficient, and a used Mac Pro that's still worth a damn (performs anywhere
close to my setup) costs over $1000
without peripherals. Not to mention my games don't even run on Mac.
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Whatever. I don't know what the means. What is "fast enough?" By the end of 2008 they'll be all LED I would imagine.
I'm saying relatively, they should have already introduced LED backlights to their products. They were the first ones to put dual-core in a mainstream laptop, and they were the first ones to put 64-bit dual core into a laptop. Not only that, but they did so while maintaining a form factor little more than an inch thin. To stay competitive, they need to have LED in laptops
now and work their way up. End of 2008 is a little late in the game.
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That's bullshit. A used Mac Pro will be able to be upgraded for years. It will last at last as long as a new midpro with a single processor.
That's the thing, not only would a mid-pro be dual core instead of a single core older Pro/Power tower, but in the PC market upgradeability to extend life life is somewhere on the order of 5-8 years starting under $1000.
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The entry level person won't buy a used Mac Pro. They'll buy an iMac or Mini.
Again, cost effectiveness. Entry level is less than $600 for a
complete system that does all the basics, even burning DVD's. Macs start at $600 for an incredibly inferior Mini that has less than half the power and can't even burn DVD's.
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The point is not the car. It's the brand and market position.
The point is totally the car. Audi is a direct competitor to BMW (placing it in the same exact bracket for brand/market position), and produces better cars that do more things right than a BMW. All BMW's can do is drive well, and in the rain they can't even do
that much (Thus they are compared to Alienware). That makes Apple more like Audi. Talk about metaphors that don't apply.
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Huh? How is Apple outmatched, any by whom?
I said specifically the
hardware was outdone. For one, the Japanese/Koreans make far better screens and disk drives. Samsung and Sony for example. Also, take a look at the kind of laptops they use in Japan, and you'll see why they are so far superior in hardware quality, limited only by their OS. Try Dynamism.com, and ignore the prices; that's because they are pretty much the only importers to the US and have a monopoly on the import market, so they can jack up the price alot more than they would in Japan. Toshiba and Panasonic are particularly good examples of superior hardware.
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I disagree. Apple has no need for this market. Even the mini is questionable in my mind. Even that has come up in price considerably. There isn't enough margin for them there. They're doing great without that segment.
Well, above I explained why I believe they are not in that market segment and why the Mini sucks. Particularly, the cost to make and buy is too high because it uses laptop parts instead of desktop parts, because that would make it "big and unsightly," even though it would put price/performance back into proportion. The Mini is an anachronistic attempt to make an entry-level computer.
You appear to have limited knowledge/experience with windows-based PCs as well as the automotive industry. You should do a little more research before blindly supporting 90% of Apple's decisions, i.e. why everyone who whines here needs a Mac Pro when price vs. performance wise in the prosumer segment it doesn't make sense and is a totally unreasonable choice.