This Time article brings up a good point.
The iPhone vs. Android is a lot like the Mac vs. PC. Interesting, hadn't quite thought of that.
http://www.time.com/time/business/article/0,8599,1843813,00.html?iid=digg_share
The iPhone is so "insanely great", much more so than the Mac vs. PC. So, perhaps, it might not be an issue for Apple. Also, people and businesses don't buy phones in the same manner as a PC. There are contracts involved, and people really only need one phone (unlike a PC).
However, if the Andriod improves and you can buy a phone for around $50, then Apple is screwed. The G1 has a lot of offer, just not at the same price as the iPhone. Over time, I suspect it will Rival the iPhone and like a Mac the iPhone will probably always cost more.