Earlier quoted context omitted.
I didn't know about the Microdrive but Wikipedia says model larger than 1GB up to 4GB were first available in 2004, nearly 3 years after the iPod. At that time for $499 it costed you could already get a 40GB iPod.
I had added this paragraph before you posted but probably after you saw my comment: >> Maybe Apple would have slightly higher storage capacities, but... we're talking about a relatively marginal difference compared to the gulf in storage capacity between these microdrive MP3 players and the flash based MP3 players of the time. An advantage, but not a revolution. Regardless, it turns out that it wasn't even a capacity…
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.