$500 is a lot of money for a cell phone. True, the iPhone is a lot more than just a cell phone, but the price is steep nevertheless. And the results seem to prove it when you read articles like this one, which showed that people are simply not willing to pay the initial price that Apple advertised.
However, the key word here is initial. Aren't we simply speculating when we say that consumers won't buy the $500 iPhone. Well, it is probably true that they won't. But that doesn't mean that the price won't come down. You might have read the entries a while back about iPhone's profit margins. If the articles are true, it's quite unlikely that Apple will sit back with a 50% profit margin.
You see, there's a lot that can happen between a product's pre-release show and when it actually goes into production. The iPhone is a number of months away; why should we be surprsied when such a huge price is shown?
Apple will likely give a significant price drop either right as they release it, or soon after so that their new product gains the popularity it needs. The first article I mentioned says this:
But pricing will likely drop by US$100 to US$200 to target the mass market, he said.
This statement is somewhat unrealistic, especially since the 30 GB iPod right now is $299 USD. The only way this would be possible would be if Apple negotiated a deal with AT&T to give them some of the profits, which quite likely has already happened. Even that would be unlikely though, because it's quite likely Apple's iPod sales would lower as people buy iPhones.
So then the bigger question about a price drop then, is when. Well, we can only speculate, as that fact is only known to Apple. But I predict it will be in the near future if Apple wants to give it half-a-chance at success. Nowadays you can get a free cellphone from a wireless contract, which goes to show the profit that a wireless carrier gets from that contract. Perhaps Apple will tap into that to allow more attractive pricing...