Some iPod #retrocomputing history!
It did not launch with AAC support. The best you could do was VBR MP3.
AAC was likely added in mid-2003.
They made a very un-Apple like decision to under-promise and over-deliver. "1000 songs in your pocket" is based on 160k and 4 minute songs. My first MP3s were 128k.
Reddit claims the original iPod got AAC support in firmware 1.4.
The specs page mentions AAC for the first time between March and October 2003.
AAC was Mac-exclusive at first. Looks like there were some dark ages where iTunes was Mac-only, and windows had MUSICMATCH Jukebox Plus.
Not a lot of people realize this, but LAME/MP3 encoding in general progressed from the early 2000s. I don't know how substantial the improvements were.
I think 128k would be very listenable, especially on the $20 earbuds and earbud-like headphones everyone wore back then.
Hydrogenaudio test back in 2006 showed a tie between MP3 and AAC at 128k.
https://web.archive.org/web/20011103172549mp_/http://www.apple.com/ipod/specs.html
https://web.archive.org/web/20031008043154/http://www.apple.com/ipod/specs.html
https://wiki.hydrogenaudio.org/index.php?title=Hydrogenaudio_Listening_Tests