The problem with Newton is that they didn`t have the market and also it was not as sellable as they tought.

Now, palm devices are really dissapearing and palm+cellphone devices are selling high. Look at Treo, last palm device, that survived thanks to the phone habilities.

With new MID computers and cellphone getting more functionality, Apple had to invest in one or another. MID`s can still be a near future device, but the cellphone market is real and is growing. And this market was asking for a better computer-cellphone device. The iPhone fills that gap easily, what no other modern phone was doing yet (yes, they had MP3, vídeo, but the screen and keyboard were awful, plus they had almost no memory for good vídeo).