In this ad, LG does a very nice job, with a dramatic violin backdrop on the handcrafting of a quality instrument for premium use. The commercial draws upon successful marketing in the timepiece industry, wherein the components and manufacture signal to the consumer the quality and prestige of the brand.
And the strategy is a good one. While iPhone commands the premium smartphone market, it is very possible that there is room at the top of the market for premium consumers. And while the G4 does not have the features or pricing to compete at that level, the advertising does until it doesn't which we'll mention shortly.
The Vertu phone takes the upmarket approach to the extreme. It's $10,000 phones appeal to a niche market. But there is likely room in the $750 - $2000 range for a phone even more premium than iPhone. Premium consumers would likely pay up for an even better build, bolder feature set and brand affinity differentiating from the masses. The challenge in producing a phone at that level is that it would inherently lack the scale of the iPhone and it could very well be more profitable for Apple to produce a phone with the same features for $999 that a new entrant could produce for $1999. But to the LG's and Samsungs of the world, with the capacity to compete at scale, a phone upmarket from the iPhone would likely work, especially if it were executed as a hero product, defined more by it's own brand than it's manufacturer (see Lexus).
Unfortunately, this approach will contradict the current strategy of cost-effectively disrupting the iPhone at the low end. In the LG video from this post, the 'premium contradiction' at the end of the ad limits its ability to command a premium. By offering an $80 discount, the consumer is drawn to price-seeking behavior, forgetting about the luxury differentiators the commercial so effectively portrayed.
Whether or not smartphone manufacturers pursue a premium, upmarket segment for iPhone remains to be seen. With Apple's scale, the answer is likely 'no'. But as brands try to move upmarket, commanding a premium audience and earning higher margins driven by quality differentiators, they must abandon their price-sensitive approaches. You don't see Starbucks coupons, you don't see Lexus commercials talking about $10,000 MSRP discounts, premium brands just don't mix frugality with the premium.
For effective execution brands must stick to their market position and if that means abandoning a previous strategy, then that's what it's going to take to effectively move upmarket.