An Apple Rumor That Makes Sense.

No, not the ever present commentary about Jobs's health, this is a new iPhone rumor that seems more plausible than the shrunken Nano's that has been bandied about. iPhone Alley is claiming that a new iPhone is being worked on that is in the form of the iPod Touch and may or may not include 3G. A cost reduced version of the current iPhone that still includes the current screen size would make sense. The key would be to reduce the cost of the data plan as well as the upfront price. If AT&T is willing to sell a $99 EDGE version of the handset that only requires a $25 a month data plan, that would significantly reduce the barriers of entry to owning the iPhone.

Doubts on the iPhone Nano

While the iPhone Nano rumors continue to swirl, I think it is worthwhile for investors and gadget freaks to go back to this quote from Steve Jobs during the October conference call about the likelihood of expanding the handset lineup.

http://seekingalpha.com/article/100980-apple-f4q08-qtr-end-9-27-08-earnings-call-transcript?page=-1&qa=true

Steven P. Jobs

Well, I wasn’t alive then but from everything I heard, Babe Ruth had only one homerun, he just kept hitting it over and over again. So I don’t think that -- I think the traditional game in the phone market has been to produce a voice phone in a hundred different varieties. But as software starts to become the differentiating technology of this product category, I think that people are going to find that a hundred variations presented to a software developer is not very enticing and most of the competitors in this phone business do not really have much experience in a software platform business. So we are extremely comfortable with our strategy, our product strategy going forward and we approach it as a software platform company, which is pretty different than most of our competitors.

This is about as straight forward a quote as you can get from Jobs. The iPhone Nano may have been a possibility prior to the gigantic popularity of the app store, but it would now represent a step backwards in Apple's quest to own the dominant platform within the smartphone space. Apple has seen first hand that applications define the winners and losers in computing and I don't see them taking the risks that fragmenting their handset lineup would entail.

Of course, this doesn't mean that Apple wont have a $99 iPhone fairly soon. A price cut in the first few months of the year shouldn't drastically impact margins and would spur sales ahead of the introduction of the iPhone 3.0. I actually believe that it would be in Apple's interest to keep producing this version of the iPhone and use it as their price driver in Christmas '09. A high-end 3.0 version of the iPhone and the current version given away for free with a contract would be a compelling combination covering the range of price points. It would suck the oxygen out of the smartphone space for the competition and deliver most of the benefits of the iPhone Nano without the drawbacks.