I think it's simply economics and a Catch 22 all rolled into one cinnamon conundrum…
• Apple can't offer EVERYTHING we want until it sells more phones…
While we think they're making plenty on the phone, they're still recouping the R&D, advertising, paying manufacturers and getting this whole thing in place in dozens upon dozens of countries. Not to mention what they probably had to pay just to get the "iPhone" name legally in all of those places (especially here). Vast fortunes have been spent to get the phones in our hands. Now they have to spend more money on the 3G innards and GPS chips on top of all the slick multi-touch technology that everyone here is overlooking because it is so 2007 (even though no one else has it) You want an even better camera? They've only sold 6 million phones. These other companies, while offering phones inferior to the iPhone, have sold many more (subsidized too) so they can afford to continue to give the better phone/video experience.
I almost willing to bet that a better phone and video camera will be available in Version 3. Considering their great relations with Google, there should be an option for videos to be remotely uploaded to YouTube accounts straight from the phone, no muss no fuss. This time next year with 30M iPhones sold, Apple will be in a much better place to offer the camera you're talking about.
• Apple can't sell lots and lots of phones unless it offers it at the magic $199 price…
I don't know why $199 is the magic bullet for folks, but that's what the economic folks will tell you. Mass market is about to be seriously, Pamela-Anderson-style penetrated, and but good. Early adopters (me x 2) had to pave the way for this new price to find its way into the stores -- oh yeah, we can't forget AT&T. Of course, we're still spending more over the long haul, but it's much less painless that way. I spent $998 + tax just 4 months ago on two 16GB phones. I'm not regretting it. There's no 3G in my area and I have a TomTom in my 300C so, the directions are covered. I think the old back still slam dunks the new one. I just wish I had the better speaker because I always seem to be a place where I want to listen to music or watch a video and I forgot to bring the earbuds with me.
• Apple can't give us the ultimate phone just 1 year after the initial launch…
Just like the iPod, Apple needs more and more reasons and ways to entice us to continue to upgrade. Think about Apple's first iPod. Really think about it. You're telling me this was the BEST Apple could do for the price in 2001. Hell no. It was good enough. They knew the dollars were in how it worked. "Keep 'em wanting more" -- ain't that the saying? Here it is, seven years later, and we've got basically an iPod that does just about eveything except blow the milkman and people are complaining about the weak camera? It's an iPod that makes phone calls and surfs the web. They call it an iPhone, but it's not. We all know it's a better iPod than we could've ever dreamed up 7 years ago when it's super-ugly cousin walked into town and ask the barkeep for a tall one. Yet we complain. Give it a little more time. I'm still looking for a built-in FM radio solution and you don't hear me making a fuss.