Apple had to build the iPhone to protect its iPod portable media player business. The iPhone was introduced as a three-in-one device; cell phone, internet navigator, portable media player. Christian Zibreg rightly points out that it’s now five devices in one, adding video camera and personal navigation:

Some could argue that the iPhone 3GS has no chance against smartphones with much better cameras capable of DVD-quality recording, like the Nokia N97, but let’s not forget the fact that hardware specs are but a part of a bigger picture called the user experience… if the new iPhone 3GS zooms past rival phones on YouTube just like previous iPhone models did on Flickr, it will be yet another indication that average users prefer the complete experience over mere hardware specs.

That’s the key. Apple removes the hardware specification as an important selling point and replaces it with a better, more complete user experience than rival devices.