Apple's Phil Schiller explains why it still makes 16G iPhones

Consumers get a cheaper phone with almost no local storage. Thereby forcing them to either maniacally manage their local storage or pay for cloud storage (although you still have to manually dump your photos?)

Apple gets less money up front (but arguable more customers due to the lower price point) and bets on making some of that up (probably more) by recurring cloud storage fees.

The concept of a "cloud" phone certainly is interesting, but unfortunately the existing model (local storage of music, apps and photos) doesn't quite encourage this.