Personally I think that Jobs/Apple were expecting the Apple TV to be the next big thing. In the world of 2007, TV was still almighty and winning the living room should have been a revolution. It should have been the entry into the post-PC world, with iPad-like and maybe real TV devices following a few years later.

The iPhone was really mostly an iPod phone with internet thrown in like on the kindle.

This is obviously based 100% on gut feeling :-)