Apple Working on Cheaper iPhone (AAPL, NOK, MSFT, GOOG)

Leave it to Apple Inc. (NASDAQ: AAPL) to grab a headline on the same day that Nokia Corp. (NYSE: NOK) reveals a tie-up with Microsoft Corp. (NASDAQ: MSFT). Bloomberg cites “people who have been briefed on the plans” saying that Apple is working on new iPhone models, on of which is said to be smaller and cheaper than the iPhone 4.

If the report proves to be true, it would put Apple and its iOS operating system in competition with smartphones that use the Android operating system from Google Inc. (NASDAQ: GOOG). This is certainly not a desperation move by Apple, but it does show that the company is wary of the speed with which Android has been deployed and the success the free operating system has experienced in the market.

In the global smartphone market, Android-based devices shipped twice as many units in the fourth quarter of 2010 as were shipped with iOS. The Bloomberg report notes that Apple “has considered” selling an unlocked new iPhone model for about $200, without a two-year contract. Android-based phones are expected to sell for less than $100 with a two-year contract by the middle of this year, a price point that Apple may never reach.

But Apple apparently does believe that it needs to get closer. The company has lowered the price of its iPhone 3GS to $49 with a two-year contract, but that reduction came only after the 3GS had been on the market for over a year and had already been supplanted by the iPhone 4. A cheaper version of the iPhone wouldn’t have to wait until its replacement was released — it could go out the door as soon as it’s ready.

A cheaper iPhone may have broader appeal in the vast markets of countries like China and India where lower cost is an important feature. Clearly Apple thinks that it can retain its chokehold on the upper end of the market with new high-end iPhones, and the only place for expansion is downmarket.

Apple could take a significant share of the mid- and low-end of the smartphone business from the new Nokia/Microsoft deal because that deal depends on Nokia’s ability to manufacture handsets cheaply and Microsoft’s ability to create an ecosystem similar to Android’s and Apple’s. Nokia can build the phones, but it’s not a sure thing that Microsoft, which depends heavily on its licensing model for revenue, will be able to shift gears to the more open sharing model that apps developers have come to expect from Google and Apple.

Paul Ausick