Let's go over your "downsides" as they apply to me. Assume I am in a situation where: 1) I do not have my iPad or Mac with me and 2) need to review a Word Doc or Excel sheet or PDF or whatever ASAP.
- Interior screen is plastic and scratches easily? Do not care. In this situation I'd rather be looking at a bigger plastic screen than a smaller glass screen.
- There is a crease? Maybe this matters; depends on how noticeable it is. I suspect Apple won't release one that doesn't meet my standards, but if they did then that would obviously be a dealbreaker.
- It's thicker or heavier? Maybe this matters; depends on how much thicker and how much heavier. Again, I suspect Apple won't release something that doesn't meet my standards (until a week ago I'd been carrying a Pro Max for years), but if they did then that would be a dealbreaker.
- Seam on back when unfolded? Honestly couldn't care less.
- Less compute power? Don't care. Don't need huge compute power for my needs.
- No built-in keyboard? What is this, 2005? I'm fine with a software keyboard.
- Not as Waterproof? Can it handle me getting caught a rainstorm? Then fine by me.
- Software challenges? I don't understand why you keep saying "it can't just run iPadOS." I'm sure it can. And even if it couldn't, Apple is perfectly capable of designing software that works in "iOS mode" when using the front screen and "iPadOS mode" when using the interior screen.
Would a dedicated tablet be better than a foldable if I were sitting at a desk? Absolutely. (But I'd also argue if I am sitting at a desk, a tablet is compromised compared to a laptop for many of the same reasons you mention the foldable is compromised, and a laptop is compromised compared to a desktop). If I am at my desk, I am not going to be working from my phone.
But if I didn't bring my Mac/iPad with me because I'm going to a networking reception that starts at 6pm and I don't want to deal with carrying a briefcase or messenger bag, and then my boss sends me an urgent email "I know you're at the event, but can you review these five pages ASAP because our partner had some last-minute edits" or "here's the 10-page teaming agreement, can you scan for any red flags before I sign", then I'd like the biggest screen I can have to do that. Because getting it done quickly while I'm at the event or in a cab is preferable than coming home and telling my wife "sorry, I know I missed the kid's dinner and bedtime, but I have to go do another 30-45 minutes of work before we can catch up."
Does this mean I am definitely going to get the fold? No. Maybe Apple prices it too high, maybe it's too thick, maybe I switch jobs and I'm not going places without a bigger device frequently. If the latter happens, then maybe I start to care about some of your compromises more than I do now.
I understand not everyone has my use case, which I am the first to admit is pretty niche. But it's not the only one. There are plenty of road warriors who might decide "this way I don't have to take my laptop out on the tray table just to respond to a few emails" or project managers at a construction site who would rather not lug an iPad with them climbing up ladders but would like a larger screen to look at blueprints on, or any number of other reasons a professional might need more screen space at a time/place they just have their phone. There are also plenty of people who are going to want the biggest screen they can possibly get in the smallest form factor they can possibly get just because, or who like to get "cool" tech from Apple, and are going to be intrigued by new factor, or think having the newest, most expensive iPhone is a status symbol.
Do I think the fold will outsell other iPhone models? No, of course not. But again, every single person upgrading from a $1100 iPhone Pro to a $2000 iPhone fold just in effect went from buying an iPhone Pro to buying a iPhone Pro + a base iPhone when looking at it from the perspective of Apple's revenue. So Apple even selling an iPhone mini percentage of folds will likely be enough to make it worth it for Apple. I suspect it is a very profitable niche, which is why even if it doesn't sell 50 million a year it won't be a flop.