The Apple iPhone 3GS
An analyst says Apple may soon offer free iPhone's, but the model will be the two-year old iPhone3GS model and customers will need to sign a two-year service contract to get the deal if it's offered. Reuters

The latest rumors have reported Apple to offer its iPhone 3GS for free as it makes way for the launch of their upcoming iPhone 5. The iPhone 3GS will be given out for $0 if customers sign onto a two year contract. Consumers waiting for the iPhone 5 may not be an ideal target, but those who fall in the mid or low-range smartphone buyers market will find the offer enticing.

Pressure is mounting as Google's Android has taken the top spot in the smartphone war and continually churns out new devices into all consumer range levels in the market. Could Apple start to counter with the free iPhone 3GS, low priced iPhone 4, and possibly an iPhone 4S release?

iPhones have been considered a high-end product for high-range buyers but the new strategy could introduce Apple into the low and mid range markets that is filled with Android devices. The free iPhone 3GS coincides with pricedrops for the iPhone 4 as RBC Capital Markets analyst Mike Abramsky describes.

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%).

Rumors reported than an iPhone 4S would be released along with iPhone 5 in September. An iPhone 4S would cater to the prepaid smartphone clients that could, in addition to the iPhone 3GS, cater to the middle range market. Other benefits for Apple's penetration into the lower end markets would create a spike in their iOS 5 users. An untapped source of 1 billion prepaid plan phone users could become potential Apple customers.

It won't be a new concept for Apple to lower prices on past models of their products. Successful examples can be seen with their iPod Mini, iPod Shuffle, and iPod Nano series. The same can be said for Apple's iPhone 3G and 3GS once the iPhone 4 was launched. The iPhone 5 release is sure to trigger some activity possibly in fall though speculations surfaced that the launch could happen in 2012 according to Wall Street.

For Apple to still offer the iPhone 3GS after the launch of a fifth-generation iPhone would be a change, as in years past Apple has discontinued its two-year-old smartphone model. For example, last year the iPhone 4 launched, the iPhone 3GS was dropped to $99, and the iPhone 3G was discontinued.

In January, the price of the iPhone 3GS was reduced even further, to $49 in the U.S. The device carries an 8GB capacity, half that of the entry-level 16GB iPhone 4, which sells for $199 with a new two-year contract.

Apple won't be launching a fifth-generation iPhone or the baby iPhone it's supposedly developing for emerging markets until 2012, according to the latest buzz on Wall Street. Another quote from Barron's report cited BMO Capital Markets' Keith Bachman saying We believe the iPhone 5 will launch in mid-2012.