If you haven't heard about the iPhone yet, long story short: Apple made a phone, it runs OSX, it treats voicemail like email, it has a full-fledged web browser, OSX widgets (which this is a place they might be cool, the Dashboard never did it for me), the entire front is a screen, there's almost no hardware buttons and everything is powered by a touch screen.
And this is an innovation?
Doesn't seem all that innovative- it sounds a lot like the past ten years of user interface design theory finally got applied to the cell-phone world. A long time ago we invented the idea of a "Graphical User Interface" (which Apple brought to market). This was a response to the increasing complexity of user applications- we no longer could make do with the keyboard. It didn't provide a rich enough interaction. Instead of making you press a physical button, we'll give you a picture of a button. We'll throw in a pointing device so that you can easily choose between buttons.
The GUI is such a dominant paradigm because we've created a multipurpose interface and created an intuitive method of access (the mouse).
Early cellphones had no GUI- they were command line affairs. That was fine for just making phone calls, but as cellphone applications became more complex, the UI had to grow to meet that demand. Most modern phones have some sort of GUI, and in most cases the screen is in color. But they've all made the same mistake- they forgot the mouse.
Have you ever tried to navigate your computer's interface without touching the mouse? You'll hit that tab key a lot, and maybe get some mileage out of the arrow keys. There's some (occasionally cryptic) keyboard shortcuts, and in the windows world you'll get quite familiar with ALT based accelerators. You can navigate using nothing but the keyboard, but you certainly won't want to.
Now imagine that you were designing a computer that had a GUI interface, you hadn't invented a mouse, and you want to make it as quick and easy to use as possible- in that case, you might be tempted to create lots of special purpose buttons. One to go to a "home" screen, one to go to an option menu, one to activate key functions. Maybe a programmable rocker switch. Shrink this into a small form factor, and you can start seeing why cellphones are as cumbersome and inconvenient as they are. You're navigating a small computer with nothing more than a crappy keyboard, a rocker switch and a few soft-buttons.
So really, Apple's "innovation" was to put the mouse back- but do it even better than a mouse. There's no real good options for a pointing device in such a small form factor other than a stylus- but those aren't the king of ease-of-use- not compared to something like your fingers. Hence the multi-touch (which isn't their invention anyway- it's been demoed live in much different arenas already). All they really did was apply the concepts of UI design to a smaller form factor and give us a reasonable pointing device. Gestural interfaces aren't new- although I don't find that they work well with traditional input devices (hence limited adoption as a major UI component on most computers).
Let me change gears and take back what I said- Apple did innovate. All innovation takes existing components and combines them in an original way- an act of synthesis takes over. The iPhone is an innovative synthesis that gives us a useable interface to the increasingly powerful "phone".
Not knowing the details of the iPhone, I can be counted as one of the naysayers. Upon hearing iPhone rumors, I dismissed them- "It's crazy to get into the cellphone market. There's too many entrenched companies. The margins are small. There's no room on a phone for truly interesting applications."
Well, I was wrong. Now that I've seen what it's going to be like, I realize that Apple has not expanded their offerings, but brought cellphones into the scope of their offerings. The concept of the iPhone is intensely Apple- a pretty black box that does everything you need simply and cleanly with no muss or fuss. Don't worry your latté soaked brain about details like "Megabytes" or "Megapixels", don't worry about changing batteries. We'll handle all of that. You just use it an enjoy it.
The iPhone is posed to be a smash, and the hype machine certainly is taking it and running with it. It's pretty dramatic, that's to be sure. The price-point is high, but for a do-it-all device, it's not unreasonable. The vendor-lock in is a big minus. By current (and very tentative analysis), it looks like the iPhone is going to hit the cellphone market like the iPod hit the MP3 player market- especially after the first run of price drops (the RAZR was priced in the same range when it came out, and two years later it's the basic model phone that you get for free with a two year contract (I remember drooling over it during the same trip to Harrisburg where I met Minna for the first time)).
So, let's assume (from every other vendors perspective) the worst case scenario- the iPhone lives up to the hype and dominates the smart phone market within 18 months. How do you kill the iPhone? You break Apple's dominance by playing Apple's game- take what we've learned about hardware and software design from the PC world and apply it to a phone. Just like in the PC world, Apple's product has the strength of an incredible UI and black-box simplicity. In the PC market, it lags because standard white-box computers offer grease-monkey design flexibility, modularity, interchangeable parts and general freedom.
To kill the iPhone (and make the dream cellphone I want) you don't need to make an all-in-one device. You need to create the next-gen Bluetooth (lower power, better security, easier pairing) and a protocol for communicating via a so that instead of a single do-it-all device, you have a bunch of devices that interlock transparently, offering the same functionality but without vendor-lock-in, modular upgradability, etc. The "handset" contains only the electronics for handling PAN interactions and displaying images on a touch-screen. The actual "cellphone module" is a tiny black box with a battery that can rest in your pocket (or your purse) and never needs to be touched except to recharge (and since it's just the antenna communication, we can probably make its battery last longer, or even move into the realm of wireless charging (inductive charging- pretty much required for this app)). The MP3 player module allows you to tie any portable disk drive in as the storage device, and there's an open market of players (that allows competition in terms of supported codecs). That is the crucial future application.