Usability trumps features, Mr. Anderson
In The Matrix, Agent Smith eloquently summarizes a key point about iPhone usability:

In other words, what good is a feature…if you are unable to use it? That Agent Smith—scary, but wise.
Seems obvious enough, but most smart-phone reviews don’t simply overlook this point, they ignore it with complete abandon while distracting you with lists of irrelevant detail.
Here’s Twincities.com on the iPhone’s competitors:
SAMSUNG’S INSTINCT (on Sprint network)
How it beats the iPhone: Higher-resolution camera with flash; photo editing, annotating and panorama building; video capture; voice dialing; voice-guided driving directions; instant/multimedia messaging; drawing pad; stereo Bluetooth; expandable memory; removable battery; handwriting recognition; tactile (”haptic”) screen feedback; laptop-modem option.
— How does Apple’s iPhone 3G compare with new touch-screen phone competitors?, twincities.com
Consumers are learning that features like instant/multimedia message are worthless if they’re not designed to be usable.
Example: Nzherald.co.nz’s Debbie Mayo-Smith writes of a friend’s conversion to the iPhone:
“It’s turned my life around, Debbie,” was his response. “Before I had the iPhone, I was a complete technophobe. I’ve had mobile phones, but never bothered much about them. Because the iPhone has been such an easy-to-use application, it has been my eye-opening introduction to the world of technology.
— iPhone - not just for the geeks , nzherald.co.nz
Many people experiencing usability like that for the first time don’t forget it. They start expecting it, then demanding it in products they buy.
So, many of those iPhones being sold aren’t just a sale to Apple—they’re a customer who appreciates that usability is the biggest feature of all. And because no competitor yet is even close to competing with Apple on usability, they’ll likely be an Apple customer for a long time.
On the other hand, how much more usable does a higher-resolution camera with flash or video capturing need to be? The thing is, usability is not a excuse to suboptimal features, which is the usual Apple practice (combo drive MacBook, i am looking at you!)
Usability works for 80% of the consumers - they are who Apple targets - NOT the few who whine about the need for features. The whiners should stick with Microsoft. Microsoft promises features galore.
What good is a higher resolution camera if the pictures from it are so noisy that they are rendered unusable? This whole “MEGAPIXELS! MEGAPIXELS! MEGAPIXELS!” hysteria is annoying and needs to stop.
And half the features that the twincities blog cites are software features. There will be free or low-cost apps available from the App Store which allow the same functionality on the iPhone within months.
Actually, cameras and video capturing still need a great deal of usability at any resolution, so they too are subject to the Dictum of Mr. Smith.
Wombat brings up a good point. If your lenses and focus aren’t good, more megapixels just gives you a larger version of ugly. If you’re looking for a good camera, buy a good camera. If you’re looking for something to take snapshots at the accident scene, the iPhone camera is good.
As for the third-party applications correcting some of this, I have my doubts. For example, the “laptop-modem” option is being specifically not allowed by AT&T. The “driving directions” appears to be off as well, since “Real Time Directions” are prohibited by the SDK license.
Yeah, Apple likes to concentrate on the usability factor first and then get to the feature list later. Apple is currently limited to AT&T restrictions as far the GSM network is concerned. Why add the hardware capabilities if the network won’t allow (support) it. Almost every other lacking feature can be implemented with/in software. I’m sure in time Apple will more API’s to the SDK that will allow greater freedoms to developers and also build into the OS some of the features a few people can’t live without.
@Peter
“since ‘Real Time Directions’ are prohibited by the SDK license”
Actually I believe that statement is part of Google Maps API License, which for legal reasons, doesn’t want anyone to use their map data for turn-by-turn directions.
Apple has said that the GPS unit in the iPhone can be used to create navigation applications.