I think Mark's post sums up both why this will sell and why what you're saying doesn't apply to the types of people who are going to buy this. This isn't a device for the bulk of hardcore internet users, it's a device for your mom or somebody who wants something computer-like but real computers are too hard for them to use to do what they want. Have you ever tried to teach someone how to use the internet on the most basic level? It's a lot harder than it seems like it would be because these people didn't grow up using computers. They want something that has big buttons that say INTERNET or MUSIC or YOUTUBE, and that's why they're going to pick this over a netbook. You have to understand that this device isn't targeted towards you.
You are once again trying to make this out to be an insignificant side project when Apple is clearly targetting the general public. If the iPad was targetted at people who want BIG BUTTONS and don't care about whether or not the device is actually good, Steve Jobs would have held his presentation in a retirement home, not in front of hundreds of tech journalists. Apple also wouldn't advertise their product on their front page as if it were a flagship product if it wasn't aimed at the same audience as their other devices.
You don't see Nokia putting their BIG BUTTON PHONE on their front page when they have far more lucrative products they could advertise.
I also think it's kind of condescending and weird to assume that we are the only users who need more than YouTube and photo browsing in a portable device/laptop alternative.
Did Apple really state that the iPad is anything like a smartphone? It doesn't have any phone capabilities! Like I said, I didn't watch the presentation so please correct me if necessary but I'd think the only smartphone comparisons would be to their own iPhone (for good reason).
Yes, like I said this is what they opened the presentation with. They call it a hybrid between smartphones and laptops, except better at doing key things than a laptop with "clunky old PC software".