Apple Is Said to Work on Cheaper, Smaller IPhonesApple Inc. is working on new versions of the iPhone that are aimed at slowing the advance of competin

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, aims to narrow the price gap that has made phones running Android more popular than iPhones. 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 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 with a contract.

Natalie Kerris, a spokeswoman for Apple, declined to comment.

Apple, based in Cupertino, California, fell $3.62 to $354.54 4 p.m. New York time in Nasdaq Stock Market trading. The stock has climbed 10 percent this year.
Smaller, Cheaper

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, said the person, who saw it last year.

Apple can 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.

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 isn’t known whether Apple intended to include this capability in the cheaper iPhone.
Universal SIM

Apple is working on a technology called a Universal SIM, which would let iPhone users toggle between GSM networks without having to switch the so-called SIM cards that associate a phone with a network, according to one person. This 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 subsidizing the cost of the phone.

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.
Margin Pressure Possible

Down-market moves by Apple are not unprecedented. 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, even as component prices decline. Still, Google’s Android operating system may suffer if Apple makes the iPhone more versatile and affordable.

The Google-backed operating system benefitted when Apple wasn’t available from Verizon Wireless. Verizon Wireless has begun selling the iPhone today.

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

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