Well, it's not arbitrary. It's the actual industry accepted definition of a feature phone. A smartphone has a lot of computational power, a feature phone does not. A smartphone can run a variety of third-party apps. A feature phone cannot. A smartphone often has extra forms of connectivity like wifi or sometimes NFC. Aside from bluetooth, feature phones usually do not have any of these forms of connectivity. Again, this isn't my definition. This is the commonly accepted definition by those who work in the mobile industry. If you don't believe me, Google it and you will see for yourself that the difference between a smartphone and a feature phone is computational power and over-all features.
Here's a simple way to figure out where a device sits. Is it markedly more capable than the most basic phones? Is it as capable as the most advanced phones? If it's somewhere in the middle it's a feature phone.
Also, just so we're clear, most phones are subsidized under contract. That's why you can get a free phone with a 2-year contract. Granted, the subsidy is often only $50 to $100 but it's still a subsidy.
I still cannot see why Apple would ever choose to make a dumbed-down iPhone. I really don't. They would be taking away features and now having to support four variations of iOS where three of them are radically different.
As for the MSRP, there are a number of factors you may not be counting. Phones take a relatively decent technological jump every year or two. There is a great deal of R&D that goes into this and each company is, more or less, doing it on their own. In contrast, Blu-ray players, TVs and the like don't actually change that much and all use a lot of the same technology, technology that is shared in other sectors.
Again, if we're talking about people who are looking for a device that's as capable as, say, an iPod Touch they're still going to want the mobile data. You can say you don't think that's the case, and with a certain segment of the population you're right. But the majority do want mobile data, it's why they go for a smartphone in the first place. Beyond that, what about Apple's business strategy makes you think they'd care about such a low-end market? They barely make computers that cost less than $1,000. The only areas where they are truly, really competitive in price are the iPad, iPhone, iPod Touch and the Apple TV (oddly enough).
With the iPod Touch, they have no need to go cheaper as it sells very well already. Well, very well ish. Sales are declining as more people go smartphone which is fine by Apple as their sales are being cannibalized by their own device, a device which costs more than the one it's killing off.
With the iPad, the price is perfect by Apple's logic and if someone wants a cheaper tablet they can go to the competition. Which they aren't. There's a reason iPads make up between 70-85% of the tablet market. As it stands, the iPad is about the same (and sometimes cheaper) than the competition while offering most of the features regular people actually care about.
With the iPhone, they already sell the iPhone 3GS at a massive discount. You can get them for $50 on contract if you know where to look. Why would they want to make a device with fewer features that will cannibalize from their already successful sales? if Apple created a device that cost $100 and offered a subset of the features the iPhone 4 offered, and assuming people stopped buying the iPhone 4 and bought the iPhone Mini or whatever instead, where's that smart for Apple? They might sell more of them but they're already selling millions of iPhones every year. Why would they want to sell more of a drastically cheaper device? It's bad business.
