I think their success has gone to their heads here
Apple obviously knows they have a great product with the iPhone, but I fear greed is going to do them in, in the end. I hope we will not see a repeat of the Mac, which was ahead of everybody back in 1984, but priced out of reach for most people, and has always remained a small niche. Maybe Apple thinks the iPhone is so far ahead of everybody that they can get away with anything, but the Mac was even farther ahead of DOS/Windows in its first decade, but people bought the slowly improving Wintel anyway. And then basically the same thing happened at NeXT, which was again a decade ahead of everybody, but went nowhere because of the low low minimum entrance fee of $10,000.
The iPod is Apple's only dominant product, because the price premium is not crazy. The brand name competing media players have some extra fluff and features, but usually don't cost much less (if at all). The iPod is priced right for mainstream dominance. The iPhone is not.
Hardware wise, it's clear from the iTouch that they can make a healthy profit if the iPhone was sold unlocked for 399. At 499 or 599, they would have margins that others can only dream of. Selling it for 999 (or 399 plus mandatory 2-year contract for minimum 1176 ) is just plain greed. Yes, I do think they have a great product, and that's why I think they could do some real damage to the Nokias, SEs and Samsungs if they were priced with reasonable margins of, say, 30%. But it seems Apple always likes getting lots of profit out of a small number of people better than getting less spread over a big number of people.
Of course, it's their product, and they can charge as much it as they like. I just hope they don't get so arrogant to think that they're so far ahead of their competition that they're untouchable. Remember the Mac. Remember NeXT.