As The Cloud Grows Bigger, The iPhone Becomes Smaller, Lighter and Cheaper

Apple Inc. is working on the first of a new line of less-expensive iPhones and an overhaul of software services for the devices, people familiar with the matter said, moving to accelerate sales of its smartphones amid growing competition.

One of the people, who saw a prototype of the phone late last year, said it is intended for sale alongside Apple’s existing line. The new device would be about half the size of the iPhone 4, which is the current model.

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.

Where the new line would be introduced couldn’t be learned, but Apple recently has released products first in the U.S. and a few other markets before rolling out the devices more broadly.

Apple also is exploring a major revamp of its MobileMe online storage service, the people familiar with the matter said. The service, which lets users store data in a central location and synchronize their calendars and contacts among computers and other devices, currently has an individual annual subscription fee of $99. Apple is considering making MobileMe a free service that would serve as a “locker” for personal memorabilia such as photos, music and videos, eliminating the need for devices to carry a lot of memory, the people familiar with the situation said.

MobileMe, part of an industry wave known as cloud computing, also could become a focal point for a new online music service that Apple has been developing for more than a year, the people said. Social networking would be another key component, one of the people said.

MobileMe and the new line of iPhones are among the top priorities of Apple Chief Executive Steve Jobs, one of the people said. Though Mr. Jobs, 55 years old, went on medical leave for an undisclosed health issue last month, he has been closely involved in the development efforts, the person said.

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