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Apple, Verizon Said to Plan 'iPhone Lite'

Verizon and the Apple iPhone
Apple may be in high-level negotiations with leading U.S. wireless carrier Verizon, but not over wrestling the exclusive iPhone contract away from AT&T: The two instead may be planning to release a tiny, tablet-style PC with Wi-Fi and a miniature version of the iPhone, according to reports.

Apple (NASDAQ: AAPL) and Verizon (NYSE: VZ) are currently discussing plans for a "media pad that would let users listen to music, view photos, and watch high-definition videos," and which would "place calls over a Wi-Fi connection," according to a report from BusinessWeek.

If reports are true, the two companies are also considering issuing a lower-end version of the iPhone, which would be smaller and less expensive than the original iPhone. The "iPhone Lite," as it's being called, would cost less because it relies on a lower-cost system-on-a-chip design , BusinessWeek said.

Exactly when either of these models will be released is unknown, but one of them reportedly may debut this summer.

The deal could make sense considering the hurdles in bringing the current iPhone to another carrier. One reason is Apple's current contract with AT&T covering rights to issue any iPhones: If Verizon wants to strike a deal with Apple, the two would have to develop and sell new products instead of the iPhone. AT&T's contract with Apple is set to expire in 2010.

William Stofega, mobile tech and trend analyst for IDC, told InternetNews.com that any release of an iPhone Lite-type of device could be planned for after the AT&T contract expires, which frees up Apple to use a mobile network other than AT&T -- or the device could use Wi-Fi or VoIP for calls. However, he said he thinks that scenario is less likely, simply because carriers don't stand to make as much money if free Internet phone services are in play.

Customers who use free VoIP apps, such as Skype, essentially bypass long-distance fees and calling plan coverage issues because they use a data connection instead of the cellular network, though they still pay for the data plan. Skype sidestepped much of that problem with its VoIP client for the Apple iPhone supports, calls only over Wi-Fi, and not over AT&T's cellular connections -- a move that seeks to avoid cannibalizing the carrier's core voice business.

"Voice pays the bills, and carriers have resisted the idea of calling on Wi-Fi and being cut out, and if Apple is going to start allowing things like Skype on handsets, that a problem for carriers, especially ones like AT&T that are subsidizing them," Stofega said.

Verizon and Apple had not yet returned calls asking for comment by press time.

Weighing the chances of a Verizon iPhone

Analysts have also pointed to another fact keeping the iPhone on AT&T: The mobile carrier's network is based on the GSM standard, and it may not make sense to spend time and money retooling the iconic smartphone for Verizon's CDMA network.

Apple also said during its most recent earnings call that original its vision for the iPhone had included worldwide networking standard -- that is, GSM, which leaves out Verizon's more U.S.-centric CDMA.

Still, Verizon has shown some interest in experimenting with advanced mobile devices. For instance, it began dabbling in Voice over IP (VoIP) devices and tablet PCs with the Verizon Hub, a consumer device aimed at the home that makes Wi-Fi calls. The device has yet to garner much attention.

The plan could also be supported by recent reports that Apple has purchased 100 million pieces of 8Gb flash memory, enough to cause a temporary flash memory shortage and prices to spike on the worldwide market -- and more than enough to raise eyebrows among Apple-watchers about the chips' intended purpose.

Even if Verizon can't sell iPhones, it's no surprise that Verizon may want to tap into the Apple magic. The iPhone helped to dramatically boost AT&T's bottom line in its most recent quarter. Spurred by the popularity of the iPhone, AT&T's wireless data revenues grew by $884 million, or 38.6 percent, to $3.2 billion, with data service revenues representing 27.2 percent of the company's revenues, up from 21.5 percent a year earlier.

Additionally, AT&T added 1.2 million net new subscribers, with three-quarters of those signing long-term contracts. Naturally, Apple's iPhone played a significant role, as AT&T activated 1.6 million new iPhone accounts in the quarter.

But would it be worth it?

In any event, if the reports are true, the benefits for both Verizon and Apple are clear -- Verizon gets a slice of the Apple pie while the iPhone maker gets a second carrier to subsidize and sell non-iPhone products, and perhaps leverage in its ongoing talks with AT&T, IDC's Stofega told InternetNews.com.

Still, Stofega warned that the "gyrations" involved in subsidizing an iconic phone or device may not necessarily pay off for the long haul, citing how Verizon topped AT&T's recent tally of wireless subscribers, 86.5 million versus 78.2 million respectively, despite AT&T's iPhone deal.

"There is a counter-position to the 'hero phone' philosophy that you have to have one of these things to make it. Sure, you get a spike in iPhone subscribers, but then Verizon fights back and tops the numbers, so is the subsidy worth it? If you want an iconic device from Apple, that's great, or do you want to make shareholders happy?" Stofega said.

But he did say it is prudent for Verizon to continue looking to get a larger cut of the action in wireless Internet devices. For carriers like Verizon and AT&T, forging deals to supply wireless Internet access to new small computing devices, such as netbooks, is important because they offer more opportunities to make money from wireless data.

"These netbooks and similar devices, there's been a lot of advances in terms of displays, power consumption, battery life. I think they're appealing to a certain segment of consumers and I think there's room in the market for them -- look at how netbooks have been selling," Stofega said.

But creating greater opportunities for Web applications on mobile devices may also raise some sticky issues for carriers.

Update adds comments from Stofega.