I think the idea of the iPhone 3GS going for free makes good sense. It's go after the low-end of the market for Apple in carriers across the mobile market here in the US.
That is exactly what Appleinsider is reporting. Will this happen? Maybe. Also, I think the retail price could be lower - closer to $300. It'll probably cost closer to $125 for Apple to make the 3GS now and it could flood the pre-paid market along with the revamped iPhone 4 with 8 GB that should take its place at $400.
Source: Appleinsider.
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