There will be a lot of hidden value added to Apple (AAPL) if they release this rumored plastic 4" iPhone 5C.
Value Addition #1 - Opening the Apple Ecosystem Up to Many New Users
This one is self explanatory and something that Tim Cook has reiterated a half dozen times - customers introduced to their first Apple product have a tendency to buy additional, complementing Apple products. The iPhone is the gateway drug that opens doors to sales of the iPad, Mac line & Apple TV.
Value Addition #2 - Accelerating the iPhone 5 & 5S Upgrade Cycle
The psychology behind this one is simple, people that currently have a 3.5″ iPhone 4 or 4S will feel compelled to upgrade to a 4″ model. Why? Because having a cheaper iPhone made of plastic with a known 4″ screen in the market will make that 3.5″ screen user feel as if they are out of the loop. Once a user has purchased a metal-bodied iPhone 4 or 4S, they will not want that 4″ plastic version. Instead, they want the iPhone 5 or 5S.
Value Addition #3 - The Rational Factor
Rational people purchase android phones because those smartphones are cheap and they get the job done. The 4″ plastic iPhone will also be a cheap smartphone that gets the job done.
Value Addition #4 - The Lust Factor
It's natural to lust over a premium product (iPhone 5 / 5S) when you have enjoyed the experience you had with a cheaper version (plastic 4" iPhone 5C) of a similar product. For instance, a lot of people purchase a 3 series BMW, fall in love with it and then years later upgrade to the M3. The same could be said for the Audi A4 & S4 and Subaru Impreza / WRX / STi.
Value Addition #5 - Gross Margins
This plastic iPhone 5C will be significantly cheaper to produce than the current iPhone 4, 4S & 5. Hypothetically speaking, if the 4″ plastic iPhone costs $150 to manufacture, then Apple could sell it for $299 and still bank over a 40% Gross Margin while simultaneously bringing down the iPhone ASP (average sale price).
ASP is very important to Wall Street and Analysts, but if iPhone revenues and gross margins are simultaneously up then ASP would become irrelevant.
Additional disclosure: I plan on purchasing more AAPL shares while under $500.