At the Apple live event, Tim Cook announced that the iPhone 4S will still be available and the price will drop to $99.
Apple is perpetuating the same strategy by keeping the previous generation iPhone in its lineup to attract customers concerned by the price. The iPhone 4 will stay in the lineup as well and Apple will give it away if you sign a two-year contract in the U.S. A similar offering should show up around the world at the launch of the iPhone 5.
With the iPhone 4S, the company is competing directly with entry-level smartphones, such as the Motorola Razr M.
Producing a cheaper phone is important as well for emerging markets, such as China, Brazil or Russia. It will allow users to switch from a feature phone to a smartphone. The platform and ecosystem lock-in is key to understanding that price point. After buying apps on the App Store and accessories specifically made for the iPhone, you will tend to keep buying iPhone products.
The question is whether users will buy a 3.5-inch 3G smartphone when nearly every smartphone now has a bigger screen and LTE connectivity.