I'm not the OP, but in my case, At least 7GB of the ~13GB available on /sdcard (partition, not actual removable media) in my Nexus S is music which I listen to on occasion - mostly in my car or on a flight. The balance (when closer to full) is pictures before transferring to local network or cloud storage or Apps installed to USB (no longer required for Nexus 4's monolothic partition), etc. Amazon MP3 with CloudDrive storage solves the balance of my music problem (you don't have to marry yourself to Google Play for everything). For most, it's simply silly to carry around your entire collection. It's unlikely you'll want all of it available, thus learning to place effective selection criteria when picking what goes to your device helps manage the size constraint.
Personally, I'd feel constrained by 8GB, but not by 16GB once you realize that even 8GB of "music" is more than anyone needs unless they're spending a TON of time away from the balance of their library. What will put the squeeze on things are 8MP photos and full HD video. Provided I can offload my photos to cloud storage (via Wifi thanks) or home storage, I can live with this level of storage. Thus, I'll be buying the 16GB version to replace my Nexus S.
Now if they had 32GB at $429, this would be a compelling compromise/price point, and would shut down many of the "it's too small" comments.