Yes, an iPhone is in that price range and is a camera among other things. However it's different from a $500 camera in a lot of ways - people buy them for lots of other purposes (texts, facebook, apps, angry birds, even voice) and pay for them on instalments via the contract. Many people come to taking pictures without having ever thought they were buying a camera, let alone putting down $500+ on one. People who would hate how technical a DSLR is love how simple and fun instagram is.

The camera in a smartphone is comparable to a $200 mid-range compact ( http://www.amazon.com/Nikon-COOLPIX-Digital-Camera-Optical/d... ) but not to $600 low-end DSLR ( http://www.amazon.com/Canon-Digital-18-55mm-75-300mm-Telepho... ) In fact the compact will have better zoom, flash, more megapixels... It will win on most metrics except ability to upload instantly.