Gahhh! You're falling into the same trap as Gruber. Android does not have to aim for the Porsche market, you don't have to *beat* the iPhone, and this isn't a zero-sum game. Google's mobile OS has the potential to be *the* main platform for high and medium-end phones, and possibly low-end ones as well.
Ask yourself why Android is so attractive to so many phone manufacturers? It allows them to dramatically lower the Bill of Materials and the R&D budget. They no longer have to worry about developing and maintaining their own operating systems, they just need to tinker around the edges. This is a huge cost saving.
Furthermore, if they're in the business of licensing the phone OS, such as HTC with Windows Mobile, then Android phones are a no-brainer. It enables them to lower the cost of producing the phone (the B.O.M.), meaning their customers - the phone carriers - can offer those phones free on relatively low cost contracts to the end-users.
And just wait until you can pick up an Android-powered smartphone for $99 without a contract e.g. the HTC Click or a Samsung device. That's likely to happen to 2010. Android at 3% and it's a failure? I don't think so. This one's a slow burner.