I want to think the iPod just became the iPhone without the LTE radio, and manufacturing more iPhones is simply cheaper for Apple. Is there any difference between the iPod touch and the iPhone for media consumption?
Try turning that thought around and you may see why it makes more sense to discontinue. If Apple can get someone to spend an extra $100 on a base-level iPhone instead of an iPod Touch, the margins aren't as good but the product pipeline is simpler and suddenly they're a convert to the iOS ecosystem and all the revenue that brings. It just doesn't make sense to offer a disconnected iPhone type device any more.
Don't ipods run ios as well? If you can buy apps and stuff, that's the same thing from Apple's perspective.
As a variation of the iPhone 7, maybe they just want to finally be done with that era of hardware and having to manufacture chips for it (although they've been great about support), and the volume definitely isn't there to justify an update to a more modern chip.
