I believe this iPhone will replace the 4S offering when the next iPhone hits.
I think they will do this phone because once the next iPhone hits, they dont want no iPhone in their offer that still has the old screen size and old connector.
Basically an 4S in a new(cheaper?) shell.
They will do this to avoid fragmentation/to put people as quickly as possible to the new screen size/connector.
iPhone 5S - 199
iPhone 5 - 99
New cheap iPhone - free
This is my prediction.
One of the first "cheaper iPhone" rumours stated it would have iPhone 5 internals....if I could find it I would but its late here.
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If the problem is the screen size, durability, and connector, i personally think that launching the iPhone 5S will make the iPhone 5 the replacement of 4/4S as the new cheap iPhone = durable, 4" screen, and lightning connector + keeping the luxurious form factor.
...but with a plastic back and rounded edges.