Those analysts are idiots. I can walk into any Sprint store and get a new phone, if I just want a phone, for free. That is not the competition for a $600 device.
This device is physically too big to make a huge dent there. Once again, it will succeed as the new iPod and mini-tablet, but that isn't the same market.
The fact that you're missing is that the right product doesn't take the market; it makes the market. The iPhone is a cell phone like the iPod was a Walkman or the light bulb was a candle or the Model T was a horse. Apple is competing for the cell phone market like Ford competed with blacksmiths and Edison competed with chandlers.
Your gripe about the size of the gadget is like complaining that a Model T weighs more than a horse, and gee, Molly, that means we'll have to pave the roads and beef up the bridges.
There were other MP3 players before the iPod, but the iPod didn't just outsell them; it outsold them all combined by a factor of hundreds. It created a new market for something people didn't know they needed until they saw it.
I think the iPhone will do for PDA/smartphones what the iPod did for digital music players. Not by showing folks how to better do what they're already doing, which is pretty nifty in itself, but by showing folks how to easily do things they hadn't thought of with a mobile device before.
And if you're looking for a tiny phone, get a bluetooth headset. Or handset. You can use that while the iPhone stays on your belt or in your pocket, briefcase or backpack.
And just to tack on, not apropos to your comments, the Zune is now about as relevant as teats on a boar hog.