Rumor Mill: Smaller, cheaper iPhone in the works

To combat the growing number of smartphones running Google's (NASDAQ:GOOG) Android operating system, Apple (NASDAQ:AAPL) is reportedly working on smaller and less expensive versions of the iPhone. The first of these devices may be unveiled as early as mid-year.

According to Bloomberg, which cited unidentified sources who have been briefed on the plan, Apple has built a smaller, less expensive iPhone prototype--it's about one-third smaller than the iPhone 4--that will sell for about $200, without subsidies. Currently the iPhone 4 is sold by AT&T (NYSE:T) and Verizon Wireless NYSE:VZ) for $200 to $300 but is subsidized, meaning that consumers have to sign up for a two-year service contract to get that price. The unsubsidized iPhone sells for more than $600.

According to sources, the smaller version will have the same processor, display and other components that are in the iPhone 4--instead of the more advanced components that will be in the new, forthcoming version of the full-size iPhone.

Making less expensive versions of the iPhone could help Apple to gain traction in emerging markets such as China and India where consumers can't afford pricier phones and don't want to sign long-term contracts with operators. It also would help the company more effectively compete with device makers such as Nokia that have a tight grip on emerging markets.

Apple also is rumored to be working on a dual-mode phone that will work on both GSM and CDMA networks. A universal SIM would let iPhone users pick from a variety of GSM networks without having to switch out SIM cards. Indeed, a recent look into the Verizon iPhone revealed a Qualcomm modem that can support CDMA and GSM networks.

An Apple spokesperson declined to comment.

In related news, the Wall Street Journal reported that although Apple CEO Steve Jobs has been on a medical leave for an undisclosed ailment for the past three weeks, he still remains closely involved in the company's strategic decisions. Citing people familiar with the matter, the WSJ said Jobs is taking business meetings at home and over the phone. He has also been spotted at Apple's headquarters in Cupertino, Calif.

Specifically, Jobs is working on a new version of the iPad and the iPhone, both of which are expected to be released in the coming months.  

For more:
- see this Bloomberg article
- see this WSJ report (sub. req.)

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Verizon to launch CDMA Apple iPhone 4 in February  
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