The Apple iPhone 5 buzz is getting louder with each passing day and the latest suggestion is that Apple will offer iPhone 3GS for free with a 2-year contract when it launches iPhone 5 later this year.

RBC Capital Markets analyst Mike Abramsky said Apple is expected to offer iPhone 3GS for free with a 2-year contract so that the technology giant can reach out to the mass market and tap the mid-market smartphone buyers, who will not pay a high price for a smartphone.

The strategy, Abramsky said, will help Apple lower the entry level for first-time smartphone buyers and help them understand why Apple even today continues to be one of the best smartphones available in the market. Additionally, it will help the company counter the phenomenal growth of Google's Android platform.

While a $49 iPhone is already available (AT&T), psychologically a $0 iPhone provides a compelling offer, Abramsky wrote in a note to clients. 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%).

A free iPhone 3GS, Abramsky said, will double Apple's smartphone market share.

However, the analyst said that even a lower priced iPhone 3GS would help Apple increase its market share. Currently, Apple is offering 3GS (8GB model) for $49 with a 2-year contract and for $449 unsubsidized. The analyst feels Apple may offer an unlocked 3GS iPhone with more storage capacity for $399 in the future. As an unlocked iPhone 4 (16GB) retails for $649 and iPhone 4 (32GB) retails for $749, iPhone 3GS (16/32GB) at $399 is a compelling alternative for those who don't want to burn their pockets.

As its entry-level iPhone strategy, Apple is expected to cut iPhone 3GS to $0 (on contract, $399 unsubsidized) in conjunction with iPhone 5 launch (we continue to expect it in September). This approach is intended to target mid-market smartphone buyers and counter Android's mid-market expansion. We expect iPhone 5 to launch at $199/$299 ($599/$699 unsubsidized), and Apple to drop iPhone 4 pricing to $99 ($499 unsubsidized), Abramsky said.

Abramsky also claims that Apple could release a baby iPhone in 2012 so that it does not cannibalize the sales of iPhone 5. The baby iPhone is expected to feature minor updates and could come with a smaller screen. It may offer basic smartphone features and give access to iCloud services.

However, Abramsky did not say how Apple will address the developers' problem as their lives will become more complicated since they will need to cater to a larger variety of screen resolutions and SoCs with huge performance differences.

It remains to be seen whether Abramsky's prediction will come true. If it does, it will represent a massive change in Apple's sales policy as the company has always discontinued any iPhone model, which is two years old. For instance, Apple discontinued iPhone 3G when it launched iPhone 4.

Meanwhile, the buzz is growing louder that iPhone 5 will be a smartphone on steroids compared to iPhone 4.

iPhone 5 is expected to boast of the following features:

> A5 processor in the range of 1.2-1.5 GHz
> Aluminum metal backing of the original iPhone instead of the current glass surface back piece
> A teardrop design, like the new iPod Touch, with the top being thick and then tapering to a skinnier bottom
> An improved antenna (no more Antennagate, yay!)
> More RAM, possibly 1GB
> Better camera (perhaps 8-megapixel) with 1080p video playback and panaromic photo capture capability and an improved dual-LED flash unit
> Bigger-edge-to-edge 3.7- to 4-inch curved glass screen (iPHone 4 has 3.5-inch screen)
> A SIM-less design
> 3-4 internal antennas for both GSM and CDMA networks
> 4G connectivity
> iOS 5, which will be true multitask capable and come with loads of new features such as News Stand, Reminders, Delta Updates and iMessage
> Improved speech recognition features, and
> Wireless charging capability
> Better talktime and standy time
> Near Field Communication (NFC) technology
> Panoramic photo capabilities and 1080p Full HD videos
> Stronger gaming capabilities supported by multi-core A5 processor and Imagination Technologies' PowerVR Series6 mobile graphics processing architecture

But be warned. Nothing has been confirmed by Apple yet. It's all just rumors and speculations.

Will Apple continue to sale or give away iPhone 3GS for free once iPhone 5 is released? What do you think? Is it sound business sense? Leave your comments below.