No one in the US buys phones out of contract, least of all downmarket customers.

Based on that comment, you have no idea what a downmarket customer is (even in the US). They aren't people who get phones "free" on contract. Downmarket customers don't have contracts. Sometimes they can't afford the guaranteed monthly expense. Often no one will give them a contract, usually because of poor credit. They're the ones who appreciate $99 or cheaper smartphones because, as limited and out-of-date as they are, they're still a big step up from the feature phones they were getting.

Yeah, I don't see Apple selling as far downmarket as, say, Tracfone. But they'll capture the midrange to low end of the contract market which is downmarket from where they were before.

I'm pretty sure the directly sold Nexus 4 did quite well in the US, to the point that google had problems with availability.

The availability problems are probably because they made a nice phone, sold it for cheap off contract and never made enough.

http://en.wikipedia.org/wiki/Nexus_4

Units sold 1 million as of February 2013[3] 3 million as of 2Q 2013[4]

Nexus isn't a downmarket brand. And it's available through carriers.