I think the whole anecdote sounds like a story that's been told a few too many times (including variations of Toshibas helpless product department making stuff

I think the whole anecdote sounds like a story that's been told a few too many times (including variations of Toshibas helpless product department making stuff they didn't know how to sell), because finding "that one thing" that made a difference" makes for a good story. Rubinstein saw the drive and realized that the price level and size was perfect for their product idea. And he had buy-in from the higher ups so they could negotiate a certain volume and price that made the project feasible. That doesn't mean another company couldn't have been successful with a smaller 1GB drive (seeing the success of the smaller iPods later on) or a physically bigger 5GB drive (people were still carrying around walkmans and CD players). What Apple managed to pull off was making a device that was easy to get music into (with iTunes) and easy to use (with the clickwheel) and, yes, compact and with good design and marketing.