In case you've been in a cave, you will have noticed that Google have released their own branded Android phone, the Nexus One (in the States, at least).
I can't help smiling at the responses saying it's some kind of 'iPhone killer' - it falls a long way short in so many important areas - seamless syncing with iTunes, a high quality app store and the user experience to name but three (emphasis mine; I know it's possible to sync with iTunes and there is an Android app store, but there's a gulf in quality at the moment).
A designer friend of mine maintains that Google are making a mistake targetting developers, rather than users. Obviously the user experience is one of the key reasons for the iPhone's success, but I think other factors (functions and features) will come into play as well. You can help users through helping developers, so long as you pay very close attention to the user experience as well.
So, what can Android / Nexus One offer that the iPhone can't? Freedom. You can install whatever you like on the Nexus One, whether it's on the (currently unappealing) official Android App Store, one of the other Android app repositories, or handed to you directly by the developer (I haven't seen the Android App Store as seen on the phone itself, but Tim O'Reilly claims its pretty good).
My prediction is that, over time, we'll start to see more and more benefits available on Android phones that are unavailable on the iPhone. I think we can expect the UI to improve somewhat - Google have money to spend on design. While it's unlikely it'll ever catch up with Apple in this department (a very subjective debate), perhaps it doesn't have to. The additional functionality will, for many, outweigh the less effective user interface.
What can we expect in terms of additional features? Some obvious ones spring to mind. Tethering the phone to a laptop so you can access the web over 3G (without a costly bolt-on) is very worthwhile. Making calls using your favorite VOIP client is another. Pornography apps is a third category - snigger all you like, it's popular! Have a look at all these apps that get rejected, thanks mainly to Apple's restrictive app store policy. Tasty.
The presence of another big name smartphone on the market will increase the size of the market overall, and the competition will do the iPhone no harm at all. And there will always be enough differences between the two offerings to appeal to different customer types. Bring on the competition!
Incidently, articles such as this one in Ars Technica claiming that the option to buy the phone free of a carrier is a game changer are off the mark. You can buy unlocked iPhones in France for an extra cost, but only 5% of early iPhone customers chose to do so. The vast majority of phones would need to be sold unlocked before quality of service would become the key differentiator between carriers - at least to the point needed to justify the huge expense of bolstering their networks (recommended: Fake Steve takes AT&T to task, hilarity ensues).