This afternoon, we recieved some intel from an iPhone source that has been reliable in the past.  Most of the information is already known but it is important to weigh in on what’s going around.  The “big” news is that Apple will be selling two totally distinct iPhones in September.  One will be a low-end variety that will address the cheap Android market, according to the source.  The other will be a high-end device and will be an all new design.  There will be no mistaking these two devices, they will be immediately discernible.  The iPod touch, like it always has, will get updated in September as well.

So that’s where the info path trails off, and to be frank, it isn’t all that surprising.  There are currently two totally distinct iPhones on the market: the iPhone 3GS and the iPhone 4.  The 3GS is at a cheaper price point while the iPhone 4 is the high-end line.

So we’ll have the same thing in September?  iPhone 4 is the low end and iPhone 5 the high end?

I’m not so sure.  For one, the price of an iPhone 4 isn’t going to compete with cheap Android phones in any way.  Apple is currently selling them for over $600.  They aren’t going to cut the price in half overnight.  The 3GS doesn’t currently compete on price either.  I think that to compete on price with Android, Apple has to make a totally new low end phone as well.

What’s it going to be?  I think a good place to start looking is the curent iPod touch.  The iPod touch has the same resolution screen as the iPhone 4 but with poor(er) viewing angles because the screen doesn’t have In-Plane Switching.  (video below)

Also, the back camera is an order of magnitude worse than the iPhone 4’s, it doesn’t have GPS, has less RAM and the battery doesn’t last quite as long.

…and obviously the iPod lacks the “phone” bits.

But Apple somehow makes a lot of money selling this “almost iPhone” for just $229 retail (and under $200 at discounts) vs. the $650 that the iPhone 4 fetches without a plan.  It doesn’t seem infeasible to me that Apple could use the iPod touch platform that debuted a full year ago to build a cheap iPhone device.

Here’s how:

Start with the same hardware.  Add the GPS/3G baseband chips and some phone wiring and a solid 3 megapixel camera and you are 99% of the way to an iPhone lite.  iPhone Air?  Whatever.

Apple could make this device, one that is thinner than an iPhone 4, with most of the same specs, for $299.  But here’s the best part:

This iPhone could be a world phone that works on all four (10?) US networks and abroad.  Apple already has Qualcomm Gobi chips in its Verizon iPhone and iPad.

I think Apple changes how it positions this device. It just sells this iPhone like it sells iPods in Apple Stores, at Amazon, in kiosks at Airports.  Let the carriers all compete on price and quality of service like case manufacturers do.  It works on AT&T but if they aren’t treating you right, you can go hook up with Verizon or Sprint.  Apple has been working on reprogrammable SIMs for some time but could just go in a low-tech direction as well.  If the carriers want the most popular iPhone ever, they play ball and they compete hard for customers.  Prices drop, options open up for consumers.  More people join the Apple ecosystem.

Most importantly, it would work on prepaid networks like Sprint’s Virgin, which charge $25/month for unlimited data.  Heck, maybe you don’t even need a voice plan.  Just 3G data and a VoIP app or two (Facetime?)

.

Virgin’s smartphone plans

Sure, carriers could buy these things up, subsidize them and give them away free.  But monthly subsidies add up quickly.  I think a lot of US customers are sick of 2-year plans. A $300 iPhone could smash the hold that carriers have on US customers.

More than that, it could put Apple back in the driver’s seat.  Apple’s iPod didn’t grab most of the market until Apple made some concessions: It made iPod Windows PC-compatible with a USB cord instead of Firewire.  Suddenly everyone could own one.  After that, the iPod’s popularity soared and Apple owned the market.

This could be iPhone’s “iPod moment”.

Apple COO Tim Cook said as much in a recent discussion with analysts.

We don’t want iPhone to just be for the rich.

It also helps to consider that Apple makes a lot of money after the original iPhone purchase.  Music, ringtones, apps, books, movies, TV shows, and now iCloud are all part of joining the Apple ecosystem.  With an iPhone that is able to move from carrier to carrier, Apple could conceivably take some cash off the top there too.  The point is, Apple could make so much more than it does currently with a mass market device.

All of your friends may have an iPhone but only 8% of Americans have ponied up for one.  Apple could quadruple its market with a move like this.

And, if Apple can build an iPhone for under $300, you almost have to wonder why they still need the iPod touch.  More on that soon.

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