There's another report about Apple's concerns here:
They noted that between calendar year 2011 (iPhone 4S) and 2012 (iPhone 5), the market dropped for everything that wasn't under $300 or above $300 and above 4" in size.
That doesn't make much sense though as their iPhone sales in Calendar year 2011 were 93m and 136m in 2012 so their unit volume grew 46%. It certainly didn't drop 22m units as the slide suggests.
They sold 153m in calendar year 2013 so unit growth of 12.5%. The growth slowed down a fair bit, the 5C was probably meant to increase the rate by making the higher volume/lower price bracket more appealing.
The main reason for higher unit growth is the price. Apple doesn't even have a $300 entry point so that doesn't seem like a reasonable cut-off to use. Their $450 phone is their 3 year old 3.5" model:
Samsung's flagship S4 from last year can be bought for just $60 more:
and both free with the contracts. They also noted this aggressive marketing of competing phones with the carriers. This is what happens with PCs because the manufacturers pass more of the profit margin to the sellers.
When you have a 5" latest flagship at the same price point as a 3 year old 3.5" phone, of course the flagship is going to sell more. The following is the S3 vs the 4S but it gives an idea of what's competing:
If they want higher unit growth, they need to design a nice low cost iPhone ($399) based on the iPod Touch that will be promoted along with the higher models and get rid of the 3.5" models entirely.
The problem is avoiding driving people down to the lower price point but they have to decide what's more important: unit growth or profit. They can't stick to a strategy of upselling by making lower down models less appealing and then be concerned about lack of unit growth because one causes the other.
What they could do this year is make a $399 iPod Touch based 4" model based on iPhone 5 internals but no touch id. The $550 model would be the 5S but they can add some different metal colors and the touch id helps with the upsell. The $650 model would be the newly designed 6 with the edge to edge 4.3" display and they can possibly have some touch improvements like pressure sensitivity or hopefully tactile touch at some point. Their payment system with the touch id would also help maintain strong upsell to the higher models but the $399 metal entry model would still be a strong model at that price.