This is getting really interesting. Between this, the Nexus 5 and the various Lumia's a $649 iPhone is starting to look very, very expensive. Smartphones at the moment seem to have got 'good enough'.
iPhones are not intended to be purchased for $649 except by the very impatient (or people who break/lose their uninsured phones). If you wait your 2 years, it's $100 or $200 on-contract. Of course it's different in emerging markets where contracts aren't the norm, but smartphone prices in the US are pretty damn close in terms of 2-year TCO.
I did the math a while ago. Don't know how it holds up. As a datapoint, we pay between $90-$100 for two phone lines with T-mobile. Includes 500MB data/tethering per phone, unlimited minutes in the US and text messages.