I just asked this same sort of question to a friend of ours who knows a lot about iPods, computers, and that kind of thing. Here is the response he gave me. It's a little long but I learned a lot.
iPods are great little devices -- they're well-made, stylish, and highly
functional. You can get MP3 players with higher capacity for less, but the
big draw of the iPod is its interface. This is one of the cases where it's
best to pony up the extra to go with the leader in the field.
Apple has a few options in the iPod line, from a player the size of a pack
of gum (yes, it's truly that small) to models that can actually play video
on their full-color screens, with a couple middle-of-the-road models to
make sure there's one for every price point. I'll go from small to big (in
terms of size, capacity, and cost).
The iPod Shuffle is insanely small. It allows people to get a taste of the
iPod line for about $100. You can see the product page at
http://www.apple.com/ipodshuffle/ Apple says this device can hold up to
120 songs, but that's using relatively low-quality files. For me, I would
probably cut that capacity in half (or maybe even a third -- I'm a bit anal
about compression artifacts.) For day-to-day use, you plug the Shuffle
into your USB socket, and load your songs while the battery charges. The
Shuffle has 3 modes of operation: Off, Sequential play, and Sandom play.
Sequential play will just play the songs in the order they are on the
device, while Shuffle will play them in a random order. The Shuffle has no
screen -- it's just a barebones music player.
The iPod Nano is one of the newest models, and starts at $199. While not
as small as the shuffle, I've seen reports of people carrying them in the
coin pocket on their jeans (the little extra pocket usually by the
right-hand front pocket) Its product page is at
http://www.apple.com/ipodnano/ Apple says this device can hold 500 songs
(again, I'd divide that by 2 or maybe 3), and it has the full-sized iPod
interface, with a click wheel and screen. The screen on the Nano is
full-color, and can display digital pictures (although it's too small for
the pictures to be of any real use) along with album art while playing a
song. The Nano attaches to your computer via a dock (much like a Palm
Pilot) and recharges its battery while docked.
Finally, there's the plain iPod, which Apple just redesigned. It starts at
$299, and can play videos on its full-color screen. The product page is at
http://www.apple.com/ipod/ipod.html It's larger than the Nano but still
quite small. Apple puts its capacity at a staggering 7500 songs (I'd
divide that by 2 or 3). Like the Nano, this one uses a dock to connect to
your computer, and recharges while it's docked.
Before your household forays into the accumulating and storage of digital music, there are a few things you should know:
Digital music is a very segmented market, and each retailer of digital
music is going to want to try to lock you in to only using their store.
Apple makes a great application called iTunes, which integrates beautifully
with the iPod line, and with the iTunes Music Store (iTMS), where you can
buy music online. The only problem is, Apple wants to sell you files that
have copy protection, such that they won't play outside of iTunes, or on
devices other than iPods. So if Spencer gets an iPod, and buys $100 worth
of music from iTMS, that's great, as long as his iPod doesn't break. If it
does, he'll have to buy another iPod (not just another MP3 player) to
listen to his music on a portable device.
Downloading digital music from Peer-to-peer networks is easy to do, but
sometimes the rips are of questionable quality, and downloading the
material is copyright infringement, and lawsuits have been filed by the
RIAA over as little as one song (to the tune of multiple tens of thousands
of dollars). Tell the kids to stay far away from peer-to-peer apps like
eMule and bitTorrent for music.
My suggestion is this: If you buy one of the kids a portable music player
(and I would highly recommend the iPod line), warn him about vendor
lock-in, and tell him that he needs to get his music via legitimate means
(i.e. no P2P). The two big things to remember are these:
You want files that are unencumbered by Digital Rights Management (DRM).
You guys have a network at home. If you've got a hard drive filled with
music, you should be able to play it on your portable devices, on any
computer in the house, and you should be able to burn the music to a CD in
the car. You bought it, you should get your fair use out of it. While you
shouldn't be burning copies for every kid in school, you should be able to
listen to your music without jumping through hoops. To rip my own CDs, I
use an application called CDex. It's free, high-quality, and easy to use.
It'll allow you to rip CDs to a central location, do some categorization (I
have folders for Genre, Artist, Album, and then the tracks within the Album
folder), and it even looks up the CD metadata for you from the internet.
iTunes will work splendidly with MP3s ripped outside of the application, so
these files will be compatible with an iPod.
If you get to the point where you have a sizable investment in a digital
music collection (either in hard dollars, or in time and effort spent
ripping and acting as a librarian), you need to think seriously about
making sure you get a backup of the collection in case of a hard drive
crash.
) And will be getting a couple of other "nice" Christmas gifts? (Perhaps digital cameras and other things.) 
