Can their margins really be that low? I understand that the iPhone is supposed to cost $500. That's over double what I paid for my Windows Mobile device almost a year ago, and as far as I can tell mine does everything the iPhone is supposed to do. More, if you count the fact that Windows Mobile is compatible with all the Office/Outlook business apps and has hundreds of third party mobile apps available.
If they're not making one heck of a margin on that, they're doing something wrong.
The margins are pretty low, and with good reason, there's stiff competition. Nothing brings down prices like multiple competing companies, very few possible feature differences and limited overall UI possibility. On tech devices there are really only 3 points of competition: features, ease of use, and price. The way the all-in-one/ uber-cellphone market has shaken out there's almost no competition in features (every device can do pretty much everything, with a few notable exceptions), all the UIs are kind of clunky so there's not much competition there, that leaves price. Apple's habit of sleak interfaces could mean they open up a new avenue of competition, but given how high they're pricing the iPhone I don't think they can win on that alone.
Part of the pricepoint is that Apple doesn't want the iPhone to cannibalize iPod sales. Their previous foray into an iTunes compatible cellphone, the abortive Motorola ROKR, was designed to hold no more than 100 songs. This is why the cell phone, which is essentially a 4GB - 8 GB iPod, must reflect the cost of 4-8 GB iPod contained within a cell phone.
Or so Apple's reasoning goes.