The lack of power and software makes them poor competitors to Blackberry or Windows Mobile platform devices. They need to crank out software to keep the inertia going.
Or they could offer competitive bang for the buck, but that would require a redesign.
Think of the I-phone as being analogous to the original, non-expandable Macintosh cube.
It still makes sense for them, but it was preventing them from hiring good employees.
If you had a choice of working for one company that attached a lot of strings to your employment, or another that didn’t attach any, which would you work for?