Well, maybe not so much the console market as the console business model.
Can the device be this cheap to make? Maybe, but I doubt it matters.
It seems Apple is going for the two-headed revenue model of Xbox.
1) Get a slice off the service. Assuming the existing deal sticks around with AT&T and is copied in other countries, Apple gets a cut of the monthly phone service plan. ($18/month currently.) This is an even better deal for Apple than Xbox Live is for Microsoft. MS has to deal with the infrastructure and up time for their for-profit service. Apple leaves all of that grunt work to the carriers and still walks away with a fat check every month.
2) Charge app authors. There will be a flood of apps for iPhone 2. Apple gets 30% of the sale of all applications--similar to fees changes for XBox and PS. If initial excitement around iPhone apps holds up--even if it's just for games--Apple stands to make a lot of money.
Apples doesn't even have to break even on the hardware to come out ahead. That puts Steve Jobs in an amazing advantage over Blackberry and others who have to make their hardware generate profit from sales alone.
In the end, I don't care. I'm happy with the money I've thrown down so far.
One request: add over-the-air calendar/contacts sync with Google.
I'll be the happiest man alive.