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.
The new line of iPhones and the revamped MobileMe are intended for release this summer, though those plans could change, the person said.
Mr. Jobs by email declined comment. An Apple spokeswoman also declined comment.
Bloomberg News reported earlier that Apple was working on a smaller, less-expensive iPhone.
Apple's work on the iPhone and MobileMe come as the cellphone market is heating up. Nokia Corp. last week said it would adopt Microsoft Corp,'s Windows Phone as the Finnish company's main smartphone operating system. Hewlett - Packard Co. meanwhile unveiled a tablet computer and smartphones based on a platform the company acquired last year.
Cellphone makers are expected to introduce an array of new models at an industry conference this week in Barcelona. Many of them will likely run on Google Inc.'s Android operating system. Research company IDC expects global sales of smartphones to rise 39% this year to 421 million units.
The iPhone has led much of the cellphone industry's innovation, and 84.2 million units have been sold since the device was introduced in 2007. Still, the iPhone's industry-wide global market share was just 3.4% last year, according to IDC, in part because of the device's higher price compared with many other phones.
IPhones nevertheless are critical for Apple, generating 39% of the $26.7 billion in company revenue for the latest quarter. Apple last week began selling its iPhone 4 through Verizon Wireless, a move that could add seven to 13 million units in sales this year, according to analysts. The carrier is a joint venture of Vodafone Group PLC and Verizon Communications Inc.
The person who saw the prototype of the new iPhone said the device was significantly lighter than the iPhone 4 and had an edge-to-edge screen
that could be manipulated by touch, as well as a virtual keyboard and voice-based navigation. The person said Apple, based in Cupertino, Calif., also plans to upgrade the iPhone 4.
The new MobileMe file-storage and music service could be available as early as June, depending on the progress of licensing talks that are in their preliminary stages, the people familiar with the situation said. Apple had planned for the service to roll out a year earlier.
The new service would give users access to their iTunes libraries from, say, an iPhone or iPad, instead of requiring that the devices be synced by cable with a computer and use space to store the actual files, the people said. The new service likely would be compatible with the iPhone 4, one of the people said.
Some MobileMe features, such as a service that locates lost or stolen iPads and iPhones, already are free.
Write to Yukari Iwatani Kane at yukari.iwatani@wsj.com and Ethan Smith at ethan.smith@wsj.com
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