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Apple don't want to be selling the 4s and 5 when the 5s come out. The 4s and 5 eat into there profits.

Missing feature will be retina display

This is very true at least according to analyst.

However the problem is average people are going and picking up a 4 or 4S because its cheaper compared to the 5. And that nibbles away at overall profit.

Since profit is a % you have to maintain high revenue to maintain high profit. Selling a cheaper device puts you back in the same place.

Only way around it is to sell a REALLY cheap device with VERY high profit %. As a salesman we call this "ripping people off", basically paying more for less. Apple already had an insanely high profit margin, this is no secret. They'd have to bump profit to 70%+ to make a cheaper device as profitable as current flagship (more or less depending on final price).

Then we have the benefits of older models already being in production. The most expensive part about having a product built is start up cost. Facilities (rented, leased, bought), worker training, machinery, new materials, etc etc.

The more I want Apple to change the less I want them too. :) I just feel a cheap iPhone is silly. Its not profitable for other manufactures and Apple maintaining there current line of iPhones seems in my opinion the best way of doing it.

A lot of Apples "cheap" products were once high end THEN upgraded to something even better. Ex iPad 2 then iPad with Retina. The iPad 2 is less expensive but it wasn't designed to make a cheap version of the iPad with Retina it just came out first.
 
I personally think specs-wise it'll be identical to the 4S. I don't think Apple will want to keep selling the 4S as is as the cheapest option when the 5S comes out. It'll be the 5S as the latest model, the 5 will be the mid-range option, and the new colorful "4S" as the cheapest model. That way they'll continue to have 3 options available for customers, and keep consistency in accessories from now on with Lightning connectors, etc.
 
I believe Apple is trying to completely rid itself of the 30 pin connector for all of its products. The plastic iPhone should replace the 4S as the "free" upgrade. I expect it to have similar specs to the 4S with minor bumps all around, but still below the 5.

Hold on there, partner. While browsing through my local technology warehouse store I noticed that just about all of the iPhone accessories such as docks and speakers still had the 30-pin connection on them. About the only thing that had the lighting connection were USB to lighting cables.
 
Processor and camera are the only things I can think of off the top of my head.

I wonder if they will increase the iPhone 5S camera to 13MP and use 8MP in the "cheaper" iPhone?

I don't think the MP count makes that much difference (although the general public disagrees). I believe there will be other differentiating camera features, such as flash, optic quality, sensor size & software features.
 
Maybe I'm not following you but when the next iPhone comes out the 5 will be 100 dollars cheaper and it uses the lightning connector.

And even if it didn't why does that matter? The 4 and 4S will always use a 30 pin connector and will always be cheaper then the latest generations. Aside from being a more "expensive" connector and cable does it offer any additional functionality? (Aside from being reversible)

The 4 & 4S will be going away. Apple doesn't want any devices using the 30 pin. Nor do they want 2 connectors for their devices. I'd bet getting everything to lightning is a top priority. And yes, the lightning cable has the ability to give additional functionality. What those functions are, I don't know. But it's much "smarter" then the old 30 pin.
 
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