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Apple Is Said to Work on Cheaper, Smaller IPhones

Apple Inc. is working on new versions of the iPhone that are aimed at slowing the advance of competing handsets based on Google Inc.’s Android software, according to people who have been briefed on the plans.

One version would be cheaper and smaller than the most recent iPhone, said a person who has seen a prototype and asked not to be identified because the plans haven’t been made public. Apple also is developing technology that makes it easier to use the iPhone on multiple wireless networks, two people said.

Chief Executive Officer Steve Jobs, who remains involved in strategic decisions while on medical leave, would use lower prices to widen the iPhone’s appeal and keep it from losing further ground to Android devices. Less expensive iPhones may also ratchet up pressure on Nokia Oyj, whose handsets are especially popular in Europe and some developing markets.

“Instead of targeting 25 percent of the global mobile- phone market, Apple would be going after 100 percent,” said Charlie Wolf, an analyst at Needham & Co. in New York, who has a “buy” rating on Apple shares.

Google’s share of the global smartphone market more than tripled to 32.9 percent in the fourth quarter, eclipsing Apple’s 16 percent, according to Canalys. Apple will face another challenge as Nokia and Microsoft Corp. join forces in smartphone development, a partnership announced today.

Photographer: George Frey/Bloomberg

An Apple Inc. iPhone 4 sits on top of iPhone boxes. Close

An Apple Inc. iPhone 4 sits on top of iPhone boxes.

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Photographer: George Frey/Bloomberg

An Apple Inc. iPhone 4 sits on top of iPhone boxes.

Natalie Kerris, a spokeswoman for Cupertino, California- based Apple, declined to comment.

Apple added $1.30 to $355.84 at 9:59 a.m. New York time in Nasdaq Stock Market trading. The stock had climbed 9.9 percent this year before today.

Smaller, Cheaper

Apple has considered selling the new iPhone for about $200, without obligating users to sign a two-year service contract, said the person who has seen it. Android phones sell for a range of prices at AT&T Inc., Verizon Wireless and other carriers, and typically come with agreements that include a fee for broken contracts. The iPhone 4, sold in the U.S. by AT&T and Verizon Wireless, costs $200 to $300 when subsidized by a contract.

While Apple has aimed to unveil the device near mid-year, the introduction may be delayed or scrapped, the person said. Few Apple employees know the details of the project, the person said. Apple often works on products that don’t get released.

The prototype was about one-third smaller than the iPhone 4, and it had no “home” button, said the person, who saw it last year.

Apple would sell it at a low price mainly because the smartphone will use a processor, display and other components similar to those used in the current model, rather than pricier, more advanced parts that will be in the next iPhone, the person said. Component prices typically drop over time.

Dual-Mode Phone

Apple is also working on a so-called dual-mode phone, two people said. This device would be able to work with the world’s two main wireless standards -- the global system for mobile communications, used by AT&T and overseas carriers such as Vodafone Group Plc, and code division multiple access, used by Verizon Wireless. It couldn’t be determined whether Apple intended to include this capability in the cheaper iPhone.

Apple is working on a technology called a universal SIM, which would let iPhone users pick from a variety of GSM networks without having to switch the so-called SIM cards that associate a phone with a network, according to one person. Having universal SIM capability built-in would help cut the cost of distributing and managing millions of SIM cards.

The new features could also give Apple an advantage over mobile carriers in influencing customers. The device would be affordable without a carrier subsidy, so buyers wouldn’t need to agree to terms, such as termination fees, that carriers demand in exchange for lowering the cost of the phone.

Global Appeal

A cheaper iPhone would help Apple make deeper inroads in markets such as China and India, where many shoppers opt for lower-priced devices that don’t carry long-term contracts, Wolf said.

Apple has also worked on redesigned iPhone software that would let customers choose a network and configure their device on their own, without relying on a store clerk or representative of a carrier, according to the person.

Apple has gone down-market before. In 2004, when sales of the original $299-plus iPod were still rising, the company introduced the $249 iPod Mini. In 2005, when the iPod Mini was still a bestseller, Jobs discontinued it in favor of the cheaper iPod Nano. Apple began selling the last version of the iPhone, the 3GS, for just $49 in January -- though it required a two- year contract.

Price cuts and the absence of a carrier subsidy may put Apple’s margins under pressure.

Still, Apple is able to get big discounts from suppliers because of the large volume of iPhone sales and by signing long- term contracts. The company said in January that it has executed long-term agreements totaling $3.9 billion in recent months.

Google’s Android operating system also may suffer if Apple makes the iPhone more versatile and affordable. The Google- backed operating system benefited when Apple wasn’t available from Verizon Wireless. Verizon Wireless began selling the iPhone yesterday.

To contact the reporters on this story: Peter Burrows in San Francisco at pburrows@bloomberg.net; Gregory Bensinger in New York at gbensinger1@bloomberg.net

To contact the editors responsible for this story: Peter Elstrom at pelstrom@bloomberg.net; Thomas Giles at tgiles5@bloomberg.net

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