Apple will reportedly offer the iPhone 3GS for free with a two-year contract when the next generation of iPhone becomes available this fall.

Mike Abramsky, an analyst at RBC Capital Market, said that Apple is “expected” to offer free iPhone 3GS for mid-market buyers. This report is consistent with earlier rumors that said Apple is preparing a lower-end model to approach the other part of smartphone market, although Abramsky’s report says Apple will simply use an existing model to do the job.

The report also said the expected price for the next generation iPhone will be around $199-299 ($599-699 unsubsidized) and the current iPhone 4 price will drop to $99 ($499 unsubsidized).

While a $49 iPhone is already available (AT&T), psychologically a $0 iPhone provides a compelling offer, Abramsky said. Proprietary survey data... suggests 14% are very/somewhat likely to buy the iPhone 3GS for free with 2-year contract, exceeding buying interest for the iPad (13%) and original iPhone (9%).

Some doubt Apple, who had been known for its costly products for high-end of the market, to release a watered-down or old model that could jeopardize their brand name.

Nevertheless, Apple had come with various kinds of iPods in the past - such as iPod Mini (discontinued), iPod Shuffle, and iPod Nano - and became successful.

Could Apple be planning to battle Android-based phone in the lower-end of the market with free iPhone 3GS?

Many rumors to unfold this September. What do you think?