The drumbeat from analyst and pundits for months has been that Apple was creating a low cost iPhone. The reasons given where mainly so they could better compete in countries like China that don't have the phone subsidies we have in North America. But the numbers just aren't adding up. There are other more obvious reasons why Apple is introducing this new phone (colors) and it has nothing to do with price (sort of).
Sure, U.S. wireless providers highly subsidize phones and make up for it with the cost of monthly service. It's possible to get a two year old iPhone for free or a one year old iPhone for $99, meanwhile those same phones would cost $450 and $550 respectively in other parts of the world or off-contract. Very rarely has Apple chased the lower-end of any market they compete in. They're mantra has always been profit margins over market share, and that doesn't seem to be changing.
There are rumors that the iPhone 5c (as it's being called) will cost roughly $450 dollars retail, which puts it at the same price as the iPhone 4 now. So the price of Apple's so called "cheap" iPhone is the same cost as their cheapest iPhone ever was. If anything Apple's profits margins may increase due to the fact that the iPhone 5c will be using a lot of similar parts as the iPhone 5 and 5s. This could lead to overall reduced cost for certain components. The new polycarbonate cased iPhone will be slightly thicker and come in multiple colors but the cheapest iPhone will still cost you $450 without a contract if rumors are correct.
Many have speculated that the "C" in iPhone 5C stands for Color, some have joked that it stands for Cheap, but I'd like to think it stands for Continuity.
By creating a new low-end model it eliminates the need to sale the iPhone 4s as the free model. Which also means there will be no more 3.5 inch screens being sold in stores this fall, giving the iPhone line up a more symmetric, and less disjointed look. The iPhone 5s, 5, and 5c all will have 4 inch screens and lightening connectors. This will not only make every iPhone on sale visually harmonious, but more physically as well.
Apple's doing almost exactly what they did with the iPod and the iPod Mini. The higher-end iPod line stayed with the classic white and black models while the lower costing iPod Mini's came in 5 colors at a more affordable price three years later. The iPod Mini didn't come out until the iPod market had somewhat matured, similar to the iPhone's current state. Apple wasn't afraid to cannibalize it's own products because if they didn't, eventually someone else would.
The major differences between the iPod and the Mini besides the size, was the amounts of storage. I'd be willing to bet memory in the iPhone 5c will start at half the size of the most expensive iPhones. It's rumored the iPhone 5c will have the same 8 megapixel camera as the iPhone 5 but will be using the processor from the 4s. All of this makes perfect sense and is typical of how Apple usually operates. I can already see the Keynote slide now with all 3 phones running iOS 7 on 4 inch displays with their prices underneath.