Well I have tried it with my sister's iPhone 4 (not the 4S as earlier indicated) and it seems to work like it should, as long as the BMW ConnectedDrive app on the iPhone was on while connected to the car through the USB cable. All apps such as Facebook, News, Twitter etc etc worked without problem.
Wifi seems to be pretty stable, well, that is a stable as the connection goes. If you have a provider that has great connection where you usually drive, then you should have no problem working with this and I can imagine that if you have 4G, it will work even better
I am wondering what benefits I would have if I owned a (new) iPhone though and if I were to use the cradle instead of the USB cable.
Also, what I would like, for example, is that if I were to use this setup, that the iPhone would automatically connect to my home Wifi as soon as I parked the car so it could auto sync itself but it seems that it is incapable of switching networks without entering passwords again. I haven't been looking much into this so perhaps there is an option for it but I noticed yesterday I lost the previous Wifi settings when I entered the settings for my phone.
Also, what would be the difference between using an iPhone 3 or 4 for this setup? And will it work with an iPod Touch as well? I haven't been able to try the 3 or Touch as I have no-one near me with those devices. I'd rather buy a 3 or Touch if it is the same as the 4, of course.
Anyways, I can say at this point that the above setup works perfect with the iPhone 4 for BMW Apps.