I don't know if it's fair to characterize people like Code Monkey and myself as niche users. Why do I say that? Let's consider the number of people who have hacked iPhones and/or unlocked them. It's been said many times in the past here on this forum that hackers and unlockers are a niche, yet Apple reports that they estimate somewhere close to 1 in 6 iPhones sold are hacked or unlocked. That's a HUGE percentage. One has to assume, based on that number, that there are a very large number of very savvy iPhone owners out there. Working from that assumption, it's fair to imagine that many many people do fully understand and make use most iPhone features, including smart playlists.
Personally, I'm very much like Code Monkey in my usage patterns. I have roughly 60 gig of music in my main iTunes library. I use smart playlists for practically everything. I have 23 active smart playlists currently that help me manage exactly which songs I move to my two iPods and one iPhone. I also use them almost exclusively when listening to music on my desktop computer. I honestly believe that many tens of thousands of iPhone users do the same thing I do. Therefore, it's really all the more perplexing that Apple doesn't make fixing smart playlist functionality on iPhone a higher priority. If smart playlists were some obscure feature that only a few hundred iPod/iPhone/iTunes users took advantage of, that would be one thing. But the fact that they're a very high profile feature across the entire iXxx line, it's a virtual certainty that a huge number of people use them. Furthermore, the smart playlist function isn't only broken on the iPhone. The iPod Classic has some serious issues with them as well. That's just bad quality control and customer service on Apple's part. Period. End of sentence.