This one needs to be taken with a firm pinch of salt - rumour has it that Apple is preparing for the launch of an iPhone Nano, which would have less functionality, and cost in the region of £150 on PAYG. Details include the fact that it might have a scroll wheel on the back, and that the internet functionality will be limited.
The source is the always-popular 'O2 insider', who suggests that this phone would see a Christmas launch. Do we believe them? Well, producing smaller, cheaper versions of grown-up products is a strategy that's worked for Apple in the past, so it's not beyond the realms of possibility...
[via IT Pro Portal]
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There's a lot of excess functionality on the iPhone that a good portion of the mass market would not be interested in. This move makes sense.