The first two generations had a ring of buttons around the wheel rather than a touchwheel; menu at the top, play/pause at the bottom and skip backwards and forwards on the left and right. The third gen moved these buttons to between the wheel and the screen. Fourth was clicky wheel, I believe.
The spinning wheel also had some inertia, which was really neat. You could give it a good spin and it would slowly "roll out". I think they tried to emulate that with the round capacitive touch thingy ("click wheel"), but that wasn't quite as nice. I guess it was more dust/dirt/water resistant, though.
No, it was a common complaint at the time when the touch wheel was introduced. They became a lot more ubiquitous after the touch wheel introduction though, but I don't think that was directly related...