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Because A) there WERE ones that could (and there are still models by Sansa and Creative amongst others with the same storage capacity as the Shuffle/Nano/Touch iPods), but Apple pretty much cornered the market so most brands ended up pulling out of the market, and B) the increase in smartphones eliminated the need to carry around two devices.
Most Android phones have a MicroSD card slot for expanded storage, giving up to 32gb (64 for the most recent models?) storage.
No, they're not going to match the 80+ GB storage of an iPod Classic, but few people need that much space (especially in smartphones with data plans and the increasing providers of "cloud" storage/streaming)
Using a phone would be great if you can keep it plugged in all day and want to pay for unlimited data. My 16 GB Nano will play for eight hours without recharging, is extremely small and light and doesn't need a data plan. I've used it since 2008. My Android phone would never last. If I use it for 2 hours of phone calls it needs to be charged.