The price drop was due to finally getting the phone subsidized by major networks.
If you bought it unlocked (or if you still do) it was the same price. It sucked a little for Early Adopters (like me) but it was completely predictable and wasn't honestly a huge surprise to anyone paying attention.
By the time the price drop happened they had sold over 25% of the smartphones that were bought in the previous quarter. They'd already met their goal of 1 million smartphones by the end of September at that point.
I swear... the rubbish I see over this: the iPhone was a wild success considering that Apple had zero involvement in that business before. It was the kind of success that many companies dream about for new hardware.
I strongly suspect that the vast majority of people--even here--"remember" a number of Apple's biggest wins as being inevitable from Day One. In fact, as you say, the iPhone didn't become a must have smartphone until 3G/3GS timeframes. Similarly, until the 4th gen iPod with the click wheel, the iPod was pretty much just another reasonably well-regarded, albeit pricey, MP3 player.
I think that anyone that doesn't remember the iPhone as being a wild crazy success was just not paying attention - and the numbers back that up.
The 3GS was when it exploded but it was already a big success by that point.
What people have to remember is the success of the iPhone is practically unprecedented in terms of adoption. It's incredibly rare to come out and dominate an industry like that when you're a new entrant into the space.
Even if the iPhone had continued it's July-September sales curve it would have been a success. It just got even more-so when the other versions came out.
I think we're quibbling over terminology. As you say, it was the 3GS that "exploded." (And it's when I personally upgraded from a Treo 650.) I agree that, to a significantly greater degree than the iPod, the iPhone was from Day 1 obviously a big deal even if it wasn't clear that most competitors really needed to get busy working on their gravestones.
In the first two months, iPhone sales were slacking so much that Apple suddenly dropped the price by $200 after just two months on the market: http://www.nytimes.com/2007/09/07/technology/07apple.html?_r...