Serenity could possibly be right, but if the 'i' in 'iPod' is simply a continuation from the 'iMac' brand (where Apple first used the 'i' prefix), it means 'internet'. This is due to the iMac being the first Mac that was "internet ready", or at least made it easy for the general public to use the internet, which at the time was still something the public wasn't hugely aware of.

Of course, that doesn't really apply to the iPod (unless you count the new iPod Touch), but Apple felt the marketing for the iMac was so strong that they would continue it. Hence why it is in many of their products.