This may have seemed like a smart policy at first. That is until you consider that a lot of countries have 3 year cell phone contracts. My 3G was the next best thing to bricked after I installed iOS 4 on it, and I still had a year left on the contract. I would have been screwed. Fortunately, you could still downgrade. That was before Apple started signing the IPAs.
The iPhone 4 is pretty rough on iOS 7 from my experience with the work phones. Usable, but they definitely chugs. The 4S though is still good for at least iOS 8, since so many current devices (non-retina iPad Mini, Apple TV) still use the A5 SoC.
The iPhone 4 is usable on iOS 7 but laggy.
Here is my video:
http://vimeo.com/74929913
My wife was OK with it, but even she started to complain a bit after a while. So, I got her an iPhone 5, and she gave the iPhone 4 to her mother. Her mother is overjoyed with it actually.
In contrast, I think the iPhone 3G is really, really slow on iOS 4. Much worse than the iPhone 4 on iOS 7 IMO.
BTW, the iPhone 5 is noticeably faster than the 4S, and it definitely holds its own against the iPhone 5s. With general OS navigation, the iPhone 5/5c basically feels as fast as the 5s, but for some things like video editing and the camera, the iPhone 5s shines. I'm thinking the iPhone 5 will be fine through iOS 9 at least.
The iPhone 5 actually has an advantage over the 5s too, which is that it is 32-bit. The iPhone 5s has a faster CPU, but the memory usage is somewhat heavier, which means that the 5 effectively has a memory advantage over the 5s.