DISCLAIMER: I bought an iPhone 3GS in July, the first one I've owned. My wife got one in August. We like the phones, but are not Apple zealots. :END DISCLAIMER
I think the prediction, if true, is good news. I don't see Apple, or anyone else non-Android, idly standing by the next 2-3 years. It should result in better hardware, better OS, better apps, and better user experience at a lower cost due to competition among the players.
Wishful thinking perhaps, but not completely. The typical customer will be an existing device owner. Since their current (non-AT&T) carrier may well offer an Android phone, Apple will have to be available on more carriers than AT&T OR have an iPhone "5GS" that's so compelling people would (still) line up to get one. I don't think Apple can "out-hardware" anyone. The 3GS is neat and capable, but as several others have pointed out, there are other phones as good or better right now.
So, I would think that the entire Apple "food chain"; hardware, iTunes, App Store, iPhone OS, and carrier partner, will have to change and adapt to compete. There may well be many phone models, from multiple manufacturers by 2012 running Android. If Google rolls out "gTunes" or something that competes decently with iTunes with the content Google could bring to the table, Apple will have to react. Ultimate winner should be the consumer.
For my part, if there's an Android phone available a year from July (when my AT&T contract is up) that is better than an iPhone is at that time, I'll likely get it. My consumer loyalty lies with me, period. I feel that's probably the case with most people. iTunes doesn't make or break the deal for me either.
As I said, good news.