The phone makers at the time really had no idea how to make a full-featured mobile computer OS. Nothing happened until Apple giving them a kick and Google saved their butts by handing them Android on a platter.
Windows Mobile back then had a fully featured browser. It was all pen driven, but it actually worked really well. The first iPhone seemed like a step back at least as far as the browser is concerned.
Data was just extremely expensive, but it was faster than the dial-up internet most of the country was still stuck with back in 2004.
Steve Jobs was right in that no one wanted to use a pen (stylus). As the market matures, this is changing, and the stylus is regaining importance at least in certain niche areas. However, for the vast majority of the mass market, your statement was, and still is, a contradiction.
But, on the subject of the "mass market"...
What Apple/Jobs did was build an awesome device for media consumption.
Up until then we'd been talking about the PDA - a productivity device. It needed a physical keyboard and stylus input to make it "productive".
The best PDA up until then was the Palm Pilot - it has exceptional writing recognition - if you spent two hours learning their alphabet. It works for email, spreadsheets. Battery life was excellent. Most people I know used it with a fold-out keyboard when traveling.
Apple realized that 99% of the time you'll using your phone to play games, read, listen to music or watch videos. Their touch screen was fantastic - it took just seconds to learn how to use it. Sure, writing emails was a pain (even with the smart keyboards), but you'd only do that rarely.
So yeah, you're kind of right: no-one whose main use-case is content consumption is going to want to use a stylus. For content creators however a well-implemented stylus is a big sell.
That's why Microsoft are throwing so much weight behind the Surface Pro, and it's also the main reason people are buying it.
Instagram alone is evidence that there are immense numbers of people creating massive amounts of content on their touchscreen smartphones. Spreadsheets are super-niche content. Text, photos, & video are mainstream content.
Compared to email on the desktop during the PDA era, I'd bet people communicate with other people much much more now via their smartphones, whether that's through email, social networks, instant messaging, or video chat.
Fans wanted a phone in there since day one. The only reason it took them six years to do it was Jobs commitment to getting it exactly right (or "his way" if you wish) which meant technology had to become available.
Windows Mobile sucked not because of WAP, but because you had to use it like a tiny desktop UI and poke at it with a tiny stylus to move a mouse cursor (depending onthe version).
The iPhone wasn't awesome because it had a "full" web browser or whatever (though it helped). The iPhone was awesome because it was a pocket sized super computer with a UI/interaction model that actually worked
Of course, it released roughly seven months before the iPhone, which beat the pants off of it. At least it could play NetHack...