Some people thought that, yeah. But not everybody, and not on the same places Intel sold their chips to.
Anyway, Intel sold their foundry exactly because its unitary profit was way too small for them. Since then, the company only got more expensive, so they wouldn't be able to keep it.
But they clearly had high ambitions for their new revolutionary ergonomic mobile "phone" + "music player" + "internet". They wanted to define a new indispensable market and they wanted to own it. They already had a multi-year product path and design pipeline for regular major upgrades in place.
The iPhone was intended to be a "next big thing" from the start.
And it seems unlikely Steve was selling Intel on doing a new chip for 1% of the phone market. He was telling Intel this was the future, in some form.
Apple was an objective market demonstration, with no ambiguity, that there was now a need for low-power first (as apposed to speed first) that would got to other suppliers if Intel didn't move.
This was a leadership failure at Intel. They happen.
Even if the iPhone wasn't an explosive hit and the smartphone growth didn't explode, 10% of Blackberries market would have meant millions of processors sold to Apple in the first years and any other Blackberry competitor that was interested,