Could Microsoft be developing a new release model?

The two year contract system is a broken model, half the time you have your phone (or more depending on your ecosystem of choice) it's outdated and has been replaced.

Microsoft couldn't sit on the sidelines with Windows Phone, to wait for WP8 would have been deadly and disappointed too many existing WP users and enterprise customers - but the existing models of update and release don't fit what MS is trying to do.

Every year Apple releases a new phone that (for this argument) is substantially different in hardware and runs it's updated OS better than the previous models.

Android phones are released on an even tighter schedule and not all of their phones get new software, but an upgraded hardware/software phone is always right around the corner.

What if Microsoft had a new model, combining the two systems and giving people a few new phones to look forward to each year, with staggered deployment. One year from the release of the Lumia 800 they'll release a Lumia phone with better specs and new software, the old one won't get Windows 8 (this, again, is for arguments sake and is not a part of this discussion), but it will have received minor updates over the year. The new phones hardware is impressive (bringing more people into the Microsoft ecosystem) and the new software really shines. This is a sustainable model as long as ALL the phones still receive minor updates and support.

Now, what if MS strikes a deal with the carriers - anyone that previously had a Windows can upgrade a few months early (I believe AT&T has done this before for iPhone) - not only are they maintaining customer loyalty (and extended contracts), but the MS ecosystem has had time to grow as the phones get higher spec and the OS gets built up. New customers will come for the new phones, existing customers' next phone will be another windows phone.

To Summarize: In order to grow the ecosystem MS needed to maintain and release windows phone 7.5, even with WP8 around the corner. A year from now there will be WP8 phones (some of which are the direct replacements for phones being released now, such as the Lumias). Customers are happy with yearly releases in other ecosystems, either because there phone can get a software update (not a guarantee for android) or because they know when there two year upgrade arrives there will be a better phone. Microsoft knows that if there next phone is substantially better in both OS and hardware specs they will gain first time windows phone customers, in order to maintain a loyal fan base of existing WP users MS could strike a deal with carriers for trade ins or early upgrades.

I was going to post this as a comment on the most recent WP rumor article, but I thought it belonged in long form here, thanks for reading.