For all I know they might have been "thinking" about it, but why didn't they do more than think about it if it was that obvious at the time that capacitive touchscreen phones would dominate the future?
I didn't say the market wouldn't move. Of course it would, but probably with incremental improvements. Why? Because mobile user interfaces changed very little before the iPhone arrived.
All the biggest competitors in the mobile space had their own operating systems that were optimized for navigation buttons/softkeys moving a cursor around, and optionally a stylus. Even new contenders like Maemo and Android were initially designed this way. Something like the iPhone would probably have evolved eventually, but I think it's odd to think that the transition to all-display touchscreen phones would have happened at the exact same pace if the iPhone had not been introduced, and that Apple only was "lucky" to have a shipping product available at exactly the right time.