Smart play by Apple, but not particularly exciting. They already sell a surprising number of 4" iPhones today and while they will see a bump in sales, I'm not sure I buy that there is going to be a sustained sales increase for this form factor or a large number of people going back down from a 6/6S.
I think it'll be jarring for many who *think* they want to go back to 4" but then realize how much screen they lose. It's one thing when you've never used anything else, very different after you're gotten acclimatized to a larger screen.
At $399 however, they are probably taking a bit of a hit to their margins, though with the 16/64 setup their overall margins are probably fine since most will be forced to go 64GB.
To me the biggest take away is that even Apple is forced to go back to the well to keep sales growth going for smartphones. With saturation, companies will increasingly be forced to go after niches to gain incremental sales. If this prompts an Android OEM besides Sony to release a 4.6" flagship (somewhere between the size of the 6S and 5SE), so much the better.