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Firstly, the iPhone is an iPod... that is also a great phone. It also has a real web browser... not some limited mobile version of the internet. People want an "iPod" that also has phone capabilities... not a "phone" that has some imitation ipod-like media capabilities
Secondly, the whole phone is software based. Six months from now, I may download a completely new feature rich phone seemlessly through iTunes. You can't add physical buttons to the verizon phone keyboard. You're stuck with the phone you buy today. With the iPhone, I have the phone of today... and tomorrow.
Thirdly, user interface is what makes the iPhone light years ahead of the competition. Competitors will not catch up... because they "just don't get it".
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