Mr. Gruber in The Case for a New Lower-Cost iPhone:

Make no mistake: Apple’s current strategy has been remarkably successful. They sell a ton of iPhone 4S and 4 devices, and have expanded the iOS market by doing so. But there are several factors this year that suggest a change in strategy.

A low-cost iPhone has great potential not only for Apple, but consumers, and developers as well.

Durability

Remember this headline? Phil Schiller Says iPhone 5 Scratching 'Normal' for Any Aluminum Product. The Internet was not forgiving.

I've seen a lot of people online criticize the durability of the iPhone. Personally, this isn't an issue for me. I carry my iPhone 4S sans-case, and have dropped it several times on hard, and soft surfaces without receiving noticeable damage. Others are not so lucky. A low-cost iPhone could be just the thing.

A low-cost iPhone (henceforth the iPhone 5C, because rumors) has the potential to be substantially more durable than its predecessors. My guess is that Apple will use a special plastic, or similar, lower cost material (that's easy to product in colors because more rumors) in place of the more expensive glass, and anodized aluminum of previous iPhones. Whatever the material, it will be engineered in a special way for increased durability, allowing Apple to show a video about the production process during the keynote, and mess with their competitors.

It's not unprecedented for an iPhone to have a plastic back. The original iPhone had a plastic piece on the bottom, and the rear of iPhone 3G, and 3GS were encased entirely with plastic. Apple has gotten away from plastic more recently, retiring the white polycarbonate MacBook (which was more prone to cracking). If Apple intends to bring plastic back, they're likely to make it superior to regular plastic in some way.

The "New" Factor

iPhone sales in general are likely to benefit from more than one new iPhone. Some folks are just fine with buying an "old" iPhone 4 or 4S, but anyone under 40 probably isn't. The constant stream of new Android phones is ridiculous, but it also affords consumers a lot of options to choose from. There's a lower chance someone they know has seen, or owns the same phone. This allows them the ability to show off their new phone to family, and friends. This isn't a particularly logical reason to buy a phone, but it doesn't have to be. Apple only needs to leverage it to sell more iPhones.

Supposedly the iPhone 5C will debut this September, and would become the new low-cost iPhone. The iPhone 4 and 4S get dropped from the lineup entirely. The iPhone 5 either becomes a mid-range option or is also canned. It would be replaced by the iPhone 5S. This scenario means that all sales after September would contribute to devices that are either new, or just one year old. This could allow Apple to safely stop supporting older iPhones sooner, thereby allowing them to become more aggressive with software innovation. This also benefits developers, who will be able to exclusively target newer iPhone hardware more safely than ever.

Kids

While this may not be as obvious a benefit, it may turn out to be an important one. Kids these days are getting cellphones at a fairly young age. With the iPhone lineup as it stands today, I'd imagine most parents would be somewhat apprehensive about giving their kids an iPhone 5, or 4S due to the cost of replacement if broken. Also, (relating back to my second point) most kids are savvy enough to know they don't get points with their friends for having an "old" iPhone.

If the new iPhone 5C is less expensive, and perceived as more kid friendly (probably enhanced psychologically by the colors), parents might find them a suitable option. The more pre-teens Apple gets into their ecosystem, the more they are likely to stay. The iPod touch is currently the device getting pre-teens in the door, but things change. If the iPhone 5C proves popular enough, Apple may be able to offer it off contract, essentially as an iPod touch, and kill the iPod lineup altogether (probably not going to happen, but I'll bet they'd love to if they could get away with it).

Final Thoughts

The iPhone 5C represents a significant boon for Apple. It allows them to further extend their brand, sell more devices, and reinforce their already immeasurably strong ecosystem. It benefits Apple to have a device working to squeeze Android out on the low end (this is one of the purposes of the iPad mini). All the better for Apple if that device is a new, low-cost iPhone they can improve each year as fall rolls around.