What You Need to Know About Apple's Rumored Smaller New iPhone

Apple's mobile operating system is one of the wonders of the technology world. I think it'll go down in history as one of a handful of the most important human-computer interaction innovations.

Even more amazing, Apple knows what it has in the touchscreen based system and it wants to spread its OS as far as it possibly can. The company's run up against the limits of technology with its lead iPhone. They can only push the price of the phone down so much while staying ahead of the competition. Meanwhile, mass market phones, which are often given away free to people who sign up for new cell phone contracts, are generally considered a low-margin, low-differentiation business.

That's the context you need to understand the news from Bloomberg and the Wall Street Journal that the company is working on a new, smaller iPhone (or perhaps it would be more precise to say another iOS device) that would be dramatically cheaper than the iPhone 4, which goes for more than $600 outside a plan with a mobile carrier.

The Wall Street Journal reports that the phone would be about half the size and have half the memory of its big sister product. Those changes -- among many others -- have major cost and pricing implications.

The new phone -- one of its code names is N97 -- would be available to carriers at about half the price of the main iPhones. That would allow carriers to subsidize most or all of the retail price, putting the iPhone in the same mass-market price range as rival smartphones, the person said. Apple currently sells iPhones to carriers for $625 each on average. With carrier subsidies, consumers can buy iPhones for as little as $199 with a two-year contract.

You almost get the feeling that Steve Jobs sat down with his engineers and said, "I need you to make me a phone that will cost $50 to make that we can see for $200. Do it." And, if we can believe what are surely planned leaks from the Cupertino company, they're at least getting close. If they can do it, Apple will have somehow created a high-margin, mass market product that can be targeted at nearly the entire mobile phone market.

With less onboard memory, the phone would rely more heavily on interactions with Apple's cloud service Mobile.me to sync up with photos and music. A lot of the language being used suggests a phone corollary to the netbook. Make your phone more of a terminal to your online locker and the Internet. Cult of Mac's Leander Kahney took this suggestion to its logical conclusion and -- via a source he says has a good track record -- even suggested the phone would have *no* memory, interacting exclusively with the cloud.