But from a high level, nobody in the entire world could be sad if their customers choose a higher-price, higher-margin product over a lower-price, lower-margin product. And suggesting that it's some kind of brave stance to say, "Yes, we'll introduce a higher-price, higher-margin product even though our customers may prefer it to our lower-price, lower-margin product" is absurd, and anyone who tries to sell that line with a straight face should be ashamed of themselves.
My point is that the iPhone took the iPods market from it. Apple had to release a phone to do this, or someone else would have eventually done it.
They did not do it to 'up sell' people, ie the thought process was never, 'lets sell the iPod for 5 years then hit those suckers with the iPhone and up sell them' it was 'lets make the best music player' then 'soon every ones music will be on their phones, we better make a phone, actually the phones we currently use are terrible, we have this interesting touch screen tech from a tablet we're developing, oh shit we can make an awesome phone...'
I'm not saying Apple are brave, I'm saying they are logical, they will release a product that will take sales from another of their product lines, as if they don't someone else will, and any sale is better than no sale. I think they would do this even if the product that was doing the cannibalization was cheaper, eg the iPad is definitely eating some of the Macs potential sales, and I think Apple are very happy about this.
If you listen to the Jobs official autobiography the iPhone resulted from Jobs / Apples concerns that the phone would become good enough for most people as an MP3 player, and thus would 'cannibalize' the iPod product, and that Job/Apple decided all the phones out at the time sucked and that they could do it better.
The technology for the capacitive screen etc was already in development but for the device that would eventually become the iPad!