Speculations based on what Apple did with the iPod will not hold true for the iPhone (or iPod Touch). Music (the original concept of the iPod) is audio which would not be very dependent on the "display size". Thus, all the audio iPod variations, with varying prices are possible, without sacrifice in its primary function -- to play music.
In contrast, while the iPhone (and later the iPod Touch***) did indeed adapt the audio features of the iPod, it is the visual component -- and as a result its applications -- that differentiate the two devices from the iterations of the iPod, and of course, the phone component in the iPhone.
Any speculation that fail to address this key visual feature and resulting applications -- especially as a gaming device, visual internet browser and portable reader, image (photo) display, email, GPS and mapping applications, etc. -- of the iPhone and the iPod Touch would likely be off base.
Because of the popularity of its visual applications, including their use as a gaming device, Apple must heed that even those who buy low end iPhone expects their free or cheap "App Store" downloads to work well in their iPhone like it would on the high end iPhone or iPod Touch.
From the perspective of applications developer, it will also complicate their work if there are incompatibilities in the technologies used in the various iPhone and iPod Touch, even in its cheapest version. In a sense, one of the attractions why many developers have been enticed to create applications for the iPhone and iPod Touch, over that of other smart Phones, is that at present, the developers have to address only one set of compatible technologies for both the iPhone and the iPod Touch. It is no wonder therefore that there are more than 18,000 applications so far developed (with many more coming) for these Apple products and with many success stories, for even the individual or young developers with very limited funds.
If for any reason, Apple must remember that the success of the third party applications is key to the continued long term success of portable computing devices like the iPhone and iPod Touch. It must not compromise this synergy in an effort to grab more percentage of potential iPhone and iPod Touch consumer market.
I agree with the perspective here that existing technology normally advances and also usually get cheaper. With this as a given, Apple mindset also require to offer the "best" in available technology. As such, Apple may offer a cheaper iPhone but it is unlikely that Apple would resort to downgrading the technology used in its products.
The retention of the old MacBook, after the one-piece aluminum notebook seems to contradict my previous statement. But not really. The old MacBook has all the features and speed that the average computer user needs -- normally as an internet device for browsing and email, writing device -- plus more applications that a more advanced user may need, at a much much lower price (sometimes just under $900 after rebates).
More important, to go back to the application of the iPhone as a phone device, it is no longer the price of the phone itself that is a stumbling block. Rather, it is the current monthly cost ($70-100) of using the phone that becomes the main hindrance towards more widespread use of smart phones. Except for those who really need all the features of the iPhone (on the go email, browsing plus phone) and can afford the monthly cost, the average phone user would be content with the usual cell phone that would cost $30-50 monthly, or in some places, as needed basis.
Unlike in US, where there are incompatible cell phone technologies, the monthly cost of using a smart phone is likely to get lower, due to competition, in other countries where compatible phone technology is used by many different carriers.
***Moreover, I can envision a time when the iPod Touch can become a universally full-fledged phone too (it already functions partly as a telephone) -- without restriction from the variations of the phone technology -- once internet telephony becomes more advanced and "universal" when wireless internet becomes more widespread. When this happens, the use of smart phones are likely to be more widespread, more rich in functionality as a result of advances in technology while the monthly cost will become lower.
The aforementioned prediction is consistent with how landline phone are increasingly substituted by wireless phones. Thus, while the basic monthly cost of phone service might be higher gone also were the prohibitive cost of long distance calls.
Considering the "elitist" focus of Apple, my own bias in trying to predict the future of Apple would be to offer easy-to-use consumer oriented portable products that would address the attraction of people to Amazon's kindle and the greater portability of netbooks. With the advent in technologies, I would not be surprise if such portable devices would also integrate with the home entertainment system, on the road, and in our more serious pursuits (education and work).