Once people start buying and using software (even freeware), the game is over. Most people don't want to lose what they use right now, it's their "personal software libraries".
That's why Microsoft Windows still dominates the desktop and even a free OS like Linux cannot compete. More than two decades of Windows near-monopoly on the desktop can't be pushed aside as easily as OSS folks would like to, though they did win on the server side.
That's also why the iPad currently dominates the tablet market and probably will for at least a few years down the road. The only chance competitors have is to sell a tablet for at most half the price of the iPad, with equivalent features (browser, music, videos, books). Unfortunately for them, the iPad can also run software made for the iPhone and iPod touch, so they are much more than a year late as far as "personal software libraries" go.
Apple, on the other hand, are simply competing with themselves. Their goal doesn't appear to be "beat the competitors products", it's probably "beat the previous iteration of our own product".
Twice as much RAM, faster dual-core CPU, up to 9 times faster GPU, facetime cameras... the iPad 1 just can't compare to the iPad 2. Imagine what's to come for future models.