Depending on your contract, the last iPhone hardware update was a "free" upgrade.
Is anyone here using a computer they purchased in 1999?
Come on.
The main reason is the CPU fan almost never comes on, so it's a quietbook.
Other than that, software development on it is a good idea, because if it runs adequately on this, it'll run blazingly faster on a new machine!
What could it have that couldn't be done in software? How about:
More storage (always more storage), more RAM, maybe a faster CPU if they could do it without ruining existing software by running it too fast, the new more precise more responsive multi touch screen design that was demo'd on recently, a front facing camera, new radio support (e.g. 4G), reduced power consuming components (3G/bluetooth/gps processors), improved internal speaker for music/handsfree use, new WiFi standard support, more CPU features, camera flash.
What about manufacturing changes? If they apply what they've done to the Macbook range to the iPhone, could they get a casing with fewer seams? Better looking? Cheaper to make? With more room for components inside?
And these are just basic predictable potential improvements without going as far as a projector or an nVidia 3D card or a physical keyboard or some new never seen before innovative change.
Very soon the typical smartphone lifespan will be close to 5 years and the average computer lifespan will be close to 10 years. The Nokia N95 was released in 2006 and there are still tons of people rocking that device. There will probably be millions of people using the iPhone 3G and the Nokia N97 in 2014 (maybe as hand-me-downs).