I think part of the point is not that this device is intended to be an immediate killer product; just a product that finds some segment and does profitably well. Just like the original ipods and iphones, and more traditionally the macs: something that sensible human beings would ridicule at the combination of price and lack of performance; but that the more curious side would like to at least try out some day.
And when you do decide to let curiosity get the better of you and you buy one, Apple will be happy enough to pocket a $500,- and say thank you. And you will show it to others, and if you like it you will let others try that too. And others will get curious; and maybe decide to let their curiosity get the better of themselves and Apple will be happy to pocket from each another $500,- and say thank you as well.
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