Apple will leave the mobile handset market in the next 8 years. Their product life cycle and other business demands will force them to do so. I can see them providing the technology to other companies which will allow them to keep their name around.
Most carriers do let you upgrade six months before your contract runs out. Then they pin you down for another 18-24 months. Its a win-win situation I suppose.
Since this is a hardware issue that affects all iPhone 4 models, they obviously cannot do replacements. They should ideally recall the iPhones and go back to the drawing board. But you know it's never gonna happen.