My theory on the cheaper iPhone
First up: It won't be an iPhone. Read the rest for why.
Now, consider this: The iPod touch currently serves one major market: teens who can't afford/ whose parents won't trust them with iPhones, and ESPECIALLY those for whom the Gameboys and 3DS' just can cut it for gaming any more. Apple's tagline for the product being 'engineered for maximum funness' all but confirms that.
But given the way the iPod touch is being promoted as a digicam or gaming device replacement, it isn't Apple's best effort. The A5 and 5MP camera aren't bad by ordinary standards, but are exactly that by Apple's own. Plus, the lack of physical buttons is a reason why many dedicated mobile gamers (check out what the folks over at The Verge say about it from time to time) are not considering it at all.
Now imagine this: the iPod touch, only magnified by 25 percent. A gorgeous 5 inch Retina Display (if HTC can shove in a 1080p display in a 4.7 inch screen, I don't see why Apple will find it impossible to do 1280p in a bit more space), A7 processor, and with enough space in the chassis to add a great (as in iPhone 5S-great) camera and a new Apple standard for external or an inbuilt physical controllers, which also would help it double up as the remote to Apple's rumored addition of apps to the ATV, not to mention the huge battery they can shove in then to manage that screen. Plus, given the fact that the iPod touch, iPhone and iPad mini have augmented costs due to miniaturization majorly, this thing could be sold for about as much as the current ones.
The other products improve with time as they would, staying within their categories, but the iPod touch evolves to become Apple's first purebred mobile gaming powerhouse, being the perfect counterpart to both, the rumoured Apple iTV and/ or the upgraded Apple TV with an App Store.
And the best thing is, that if they manage to shove in an optional 3G/ 4G LTE radio, it can even get rid of the general public clamour for a cheaper iPhone, while allowing Apple to skirt around what they had previously said ('Phones' should be used with one hand. But we never said anything about portable gaming beasts now, did we?), kinda like with the iPad mini (no freaking 7-inchers, unless you got some sandpaper on you!)
All the pieces seem to be falling in place to me. It's time for the iPod touch, the flagship and last iPod most would even consider in the age of smartphones, to evolve, if you ask me. What do you guys think?