And it must have sucked or else people would have bought it in iPhone-like numbers. Apple changed the category by figuring it out.
When the iPhone launched, people like me [0] couldn't really understand it. I was a top five percentile earner in the UK, but still new to that bracket having only recently left uni. I was used to mobile phones being expensive at £400 commitment, £1800 (Uk price with minimum O2 exclusive contract) was unbelievable to me.
I made the mistake of looking at the original iPhone, and seeing something that was slow (no 3G), didn't have GPS (recently moved to London, I needed my GPS-maps!) and didn't support any third party applications. It was a joke. It sold buckets loads.
The problem was before that mobile apps were a limited affair. We had things like google maps on smartphones, but not much effort went in. We had a few games, but no one was really pushing serious money in that direction.
The iPhone became a fashion hit. It was the must have for the 20-something plus who could afford it, it was a status symbol because of price. Everything about it was worse than phones on the market, it took ages to make a call, writing a text took considerably longer. It simply didn't make sense as a phone.
However it became a platform. Companies from all walks of life, some who hadn't really bothered to have a website suddenly needed an 'App' for their marketing team to be happy. This created such gravity, people thought that Android would never be able to compete.
The internals of it were not really special at all, it was quite slow, the screen resolution awfully poor. It wasn't until the 4 addressed that last major concern I bought one.
[0] - http://forums.hexus.net/iphone-ios/110525-iphone-demo.html#p...
The iPhone wasn't a platform until it had significant consumer adoption anyway...the App Store didn't open until nearly a year after launch. It turns out that being a hot fashion accessory and status symbol is actually more important for consumer adoption than speed of calling or texting.
Compared to a regular non-smart phone it had enormous amounts of RAM and a hugely more powerful CPU, which enabled it to run a real web browser (as opposed to Opera Mini). It also allowed fancier apps in general, once they allowed them at all, but I think the browser was pretty much the killer app.
Compared to smartphones it got rid of the stylus. This made it less capable but a lot more convenient. Having to fiddle with the stylus every time you pull the phone out of your pocket was probably, I believe, one of the things that made most people reluctant to switch to smartphones.
Also, as far as I can tell, most phones in the US were pure garbage compared to what we had elsewhere, before the iPhone upset the control of the carriers and encouraged people to pay more. If the US market had looked more like Europe, perhaps the iPhone wouldn't have been seen as such a revolution.