The main market for the iPod Classic is DJs and other folks who need a massive music library at their fingertips. I see a lot of DJs with an iPod, or maybe two, in place of the crates of discs they used to lug around. A niche market, to be sure; and with iCloud allowing you to download albums on the fly, the niche is getting smaller.
I have a third-generation iPod Nano that I keep hooked to the stereo when I don't want my iPhone tied down (because I'm using it for stuff). As AirPlay gear gets more common, that niche use is shrinking, too.
Then there are all the folks who can't afford or don't want smart phones. We folks who are immersed in technology all day tend to forget that free-with-contract phones or $10 burners are still a huge hunk of the market. The trend is away from single-purpose music players, but there's enough of a niche to support them for now; and for the foreseeable future, there will still be a niche for something like an iPod Shuffle, for kids who might break things or for going someplace where you don't want to take an expensive device.
>>I have a third-generation iPod Nano that I keep hooked to the stereo when I don’t want my iPhone tied down<<
Now, that’s kinda funny, because I’ve sort of done the same thing. I use my old Mytouch Fender phone as my “iPod” separate from my phone that replaced it - my galaxy s. The fender doesn’t have a registered sim, so I use it as if it were a 16 GB iPod. Works great.