The original iPod sales looked like this [1]. Tell me if you think if it falls into your first category. For the first 3-4 years, very little movement. It is interesting to me that a large number of people feel iPod was a smash hit right out of the gate.
[1] https://geekwhisperin.files.wordpress.com/2009/05/total-ipod...
(Mostly because, for the critical mass of users, the first good-enough version is the first version; it's the first version their friends were excited enough to tell them about, so it's the first one they tried.)
Which is all to say: stop worrying about putting people off with a bad launch product. Ship the dang thing, and keep shipping it, and eventually, somewhere in there, the thing you're shipping will get good enough to get people paying attention. It doesn't matter what the early adopters think; they don't get to write history.
iPod didn't have some miraculous transformation over its first three years. It pivoted from being a Mac accessory into a standalone music player that anyone (Mac or PC owner) could use.
[1] http://commons.wikimedia.org/wiki/File:Ipod_sales_per_quarte...