I don't know, I think the zune looks pretty cool with the (free) laser engraving, for example:
And it doesn't really matter that it doesn't work with iTunes. A big part of the whole wifi thing is that with the subscription service, you can download songs wherever you are, as much as you want, which is especially great for the smaller capacity players...
Interface-wise, the zune is way more intuitive than the iPod classic, and the touch senstitive pad mirrors a lot of the functionality of the iPhone when it comes to flipping through albums. I don't own a Zune, but I do own an iPhone, and have tried a friend's zune and it's pretty close to that, which is a huge step up from endless clickwheel scrolling and shifting through albums in the ridiculous iPod classic menu system.
The folks that think wifi is useless without a web browser don't seem to be thinking of MP3 players as music-only devices anymore. I think that as Apple shifts focus to the iPod touch, which is really getting into PSP territory with all the games and apps and extra shit, it's important that there are some pure, full-functioned and innovative music devices out there. I think if Windows would wise up and include FLAC functionality to the zune, they'd get a lot of people on board who really just want a music player that plays music...
Anyways, I think this looks like the beginning of where the Zune stops being a step behind the iPod and really coming into its own as a product, which only means more choices for us.
They are called playlists - if you have thousands of songs you should really have playlists. Also, the Zune with all the laser engraving I suppose looks cool to you but it looks stupid to me. I'll take the clean shiny back of an iPod any day (let's not get into the scratching argument, I just put a simple clear cover on it so it stays looking nice).
Wi-fi downloading is only useful when you're in a place that allows you access to their WiFi for free. Maybe I don't live in a big enough city but I can't remember the last time I actually stumbled across a place that had honest to God free wi-fi. (I live in the 3rd largest metropolitan area in the country so I'm certainly not out in the middle of no-where).
If you just want a music player to play music you can get a Classic or a Nano - I'm not really sure what you're after here. The Nano isn't full-functioned or innovative?
Also, FLAC wouldn't do a single bit of damage what-so-ever. MS might gain a couple hundred people (you, apparently, included) but the masses just don't give a crap. Hence why they discontinued the 160GB - it just wasn't selling for squat.
As long as the Zune doesn't have iTunes support it will be behind the iPod - that's not some fanboy talk that's just how it works with the masses. Apple hasn't had the best or most feature rich MP3 player on the market for years but yet their market share remains impressively high - that should be proof enough that the masses don't care about features they'll hardly, if ever, use.