To be clear, Borcher isn't saying that the device was terrible, just that the focus by Apple wasn't where it should have been. He says that in the early days designing the phone, the "value propositions" that Apple focused on (in order) were: "a revolutionary phone, the best iPod ever and the Internet in your pocket". However, Borcher has come to realize that Apple oversold the phone part of the equation and should have reversed the order of those value propositions, because the real revolutionary aspect of the device was in the web browsing experience compared to other smartphones of the day.
Of course, Apple did seem to realize its mistake soon enough, because the iPhone 3G shifted the focus to apps and having the Internet in your pocket. Still, it is always interesting to hear how the original designers look back on the process.