It seems to me that Apple went from this lineup strategy:
Budget (i.e 8GB only), Outgoing Model (last year's Elite with less margin), Elite Model (latest innovations).
To this lineup strategy:
Budget (i.e. 8GB only), Fun Model (all about the looks at this point), Elite Model (latest innovations and specs).
I think it was a smart move and it did not have much to do with saving money, instead I think it has a lot more to do with making the middle range device appealing to a different set of people for which it did not appeal to before.
For me, with the old line up strategy I was never compelled to upgrade to last year's model. It just does not make much sense with carrier sub., especially when I know I can sell my 2 year old Elite model for about the same or more as what it cost me to upgrade in the first place. Why would I just not get the latest Elite model again? I am not saving anything and the outgoing model offers me nothing more or different than the latest Elite model. So do I care the last year's model is $100 cheaper than the latest Elite model? No, why would I? It makes no sense what so ever for anyone on contract.
However, I can see the Fun model being a different value proposition. It offers something the Elite model does not. It's a fun fashion statement at this point. Something the Elite model does not attempt to do in the same way as the 5c. So it may appeal to people in a way that last year's Elite model does not. I seriously considered the Yellow or Green one vs buying the 5s. That thought would have never entered my mind if it was simply last year's Elite model. THIS...THIS point right here is what makes the C, compelling. Its not the 5. Its a different value proposition and makes it more compelling than simply last year's Elite model.
It will be interesting to see what Apples does with the Fun Model next year. I don't think it will just be about the internals spec bumps.. its going to have to be about something people can immediately see and appreciate at first sight compared to this year's fun model. Apple needs to make it even more compelling and make it stand apart even further from the Elite model. Apple is like BMW building a Mini Cooper image with the C, while still making Bimmers with the S line. It not just about the internals or saving money on the construction, its about a different kind of appeal and value proposition while keeping margins healthy for both types of products.