Geez, not this again.
For all the same reasons Microsoft failed with the KIN this will fail also. I don't think Apple is that clueless.
First, Apple doesn't give a rats behind about market share, they care about profit. So, for the same reason they don't make $500 laptops only to turn a $50 profit they won't make $200 phones only to make $20 profit. And if you think that it is even possible to make more than that on the phone you have nowhere further than to look at the price of the iPod Nano 8 GB. It costs $149.
Now, compared to the iPod Nano, a device with at least 3-times the screen size, the addition of a cellular chip, Wi-Fi, Bluetooth and a larger battery, it's going to cost at least three times as much.
Apple already sells a cheap iPhone. It's the previous generation hardware with 8 GB of memory sold on contract for $99. People are not going to pay $200 for the privilege of owning an cramped, unlocked iPhone. Believe me, at 1/3 the size it will be cramped. And even if they could get it on contract for free. It's the data plan that will kill this just like it killed the Microsoft KIN.
If Apple releases this, I swear I will eat yellow snow.