The thing is, Apple isn't trying to compete with existing product categories (such as handheld game platforms like DS or PSP, or such as current phone-based games). Much like Wii competes only tangentially against 360 and PS3, Apple has an opportunity to define a new product subcategory here.
I expect the iPhone will become a huge platform for gaming, but it will largely be a new type of gaming. First, on phone, people prefer casual games, because they can play for a few minutes at a time, pick up where they left off, etc. The casual games for iphone are going to blow away what you can play on other phones, both because the screen is one of the best, and because it can take advantage of the accelerometers, camera, and multitouch. These types of games won't lose anything for the lack of hard buttons.
More serious games will also succeed, but these will not be games or categories we are currently familiar with; don't expect a lot of FPS, etc. Think creative variations on current game categories. And RTS and turn-based games, of course, would be quite playable w/o a keyboard.