You seem to be hung up on Moore's law as well. And while Moore's law has lost some of its teeth in recent years(and tricks like cluster computing and specialized designs are staving off some of its effects), hardware still grows old quickly. (And bitching about your 5 year old $1k hardware is hilarious to those of us who remember paying $5-8k or more for "all the computer you will ever need" only to see it become almost entirely obsolete in less than a year.
But the fact is this: your 5 year old etch-a-sketch only has 256mb ram on which to run its OS and apps. Considering what people expect out of a tablet these days by way of web browsing, multitasking, etc, your iPad 1.0 actually IS obsolete, or quickly will be.
As to open sourcing the design - why in the world would Apple open source the trade secret that literally makes it Apple? The fact that Apple built it and no one else does is literally what makes Apple all of those earnings.