Tim Cook, Apple COO:
The traditional way that all of us were taught in business school to look at a market was you look at the products you are selling, you look at the price bands that are in the market, you think of the price band that you product is in and assume you can get a percentage of it, and that's how you get this addressable market. That kind of analysis doesn't make really great products. The iPod would not have been brought to market if we had looked it that way. How many $399 music players were being sold at that time? Today the cell phone industry, a lot of people pay $0 for the cell phone. Guess why? That's what its worth! If we offer something that has tremendous value that is sort of this thing that people didn't have in their consciousness, it was not imaginable... I think there are a bunch of people that will pay $499 or $599 and our target is clearly to hit 10 million and I would guess some of those people are paying $0 because its worth $0 and willing to pay a bit more because its worth more.
Short version: creating the best cell phone in the world required being willing to charge for it. And if you can make a cell phone worth charging for, people will pay it. Apple's Dip was working their way through a barrier (charging) that no one has felt willing to make such a huge bet on before.