When people buy a new iPhone they usually sign a contract with one of the major carriers for 2 years. This means that they agree to continue to use their phone service for the next two years in exchange for receiving a discount on their phone. While most people hate contracts, chances are they will be using the same cell phone service for the next two years anyway, so in all honestly, it makes sense to sign the contract and get a good deal on a new phone (for the most part, you will have to sign a contract when you first sign up for cell service anyway).
After the original two years are up on the contract, or whenever they allow for a new upgrade, it makes sense to upgrade your phone.
To illustrate this point, let’s use some numbers. An iPhone 4S 16gb without a contract would cost $600 to buy, but most people would buy it with a two year contract instead and thus pay $200. This equals a $400 savings for using the two year contract, or $16.66 a month savings ($400/24) to stay on a contract with your carrier. So really, by staying on contract you are eligible for a $400 savings every two years.
When you think about it, you should always take advantage of this phone subsidy, as you will likely be staying with the same carrier anyway. Otherwise you are effectively losing $16.66 a month just to have the option to switch phone carriers. Sounds a little expensive!
Even if you did not have any interest in the new iPhone 4S, and you were happy using your old iPhone 4, it would still make sense to upgrade to the 4S and then sell it for the current market price of $600 and make $400, effectively converting your $16.66 a month savings to cash for staying on a contract with your carrier.
Additionally, if you wanted to upgrade to the 4S but you don’t really have the money to pay for the $200 to buy the new one, you could sell your old iPhone 4 to help pay for it. Used iPhones are usually worth a decent amount of money, and often even more than a new one on a contract would cost. For example, if you purchased the 16gb iPhone 4 in June 2010 you paid $200 for it and at the time of this writing, (November 2011, some 16 months later) a used iPhone 4 is still worth about $200. This means that you could sell your old iPhone 4 and have enough money to buy a new iPhone 4S! If you upgraded to the iPhone 4 in June 2010 you would already be eligible for an upgrade now, and that means that you could get the new iPhone 4S FOR FREE!