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5 Reasons a Small, Cloud-Based iPhone Makes Sense

Earlier this week, rumors of a smaller, half-price iPhone from Apple started circulating from the Wall Street Journal. As someone who prefers mobile devices with screens between 4- and 7-inches, I quickly dismissed the idea of a mini iPhone. But after I started thinking about Apple’s (s aapl) various revenue sources, the fact that the current Apple TV is a streaming device, and how Apple manages the iPhone experience through iTunes, I began to see several reasons why a small, cloud-dependent iPhone makes sense.

1. It’s all about the price. The cost of the phone affects both Apple and consumers. Apple needs to find a way to keep its profit margin high while still reducing the price consumers pay, or risk not having a product that competes against Android phones in the free-to-$150 price range. One way to accomplish this: Design a smaller iPhone with less internal storage while squeezing component suppliers for better pricing through large prepayments. The bill of materials for Apple’s iPhone 4 is a reported $187.51 according to iSuppli, and the two most expensive components are the very ones that would be cheaper on a smaller iPhone with less onboard storage: the display and the flash memory.

2. Changing the app game again. Clearly, a smaller iPhone will still need some amount of flash memory for the operating system and for application storage, among other things. But that doesn’t mean a cloud-based iPhone has to be limited to a certain number of apps. This rumored device could re-energize the web app market, which is in fact how third-party apps were originally intended to appear on the iPhone platform. What’s different now? Web standards have matured, allowing for support of offline storage, better video playback, and improved graphics capabilities to name a few things. Or Apple could open a new door for developers by supporting application subscriptions much like it’s doing with in-app content purchases: Users purchase an app for use during a month, for example, after which time, they either re-subscribe or the application is cleared from memory to regain space. Perhaps that’s too radical of a change for some. A more realistic strategy may be Apple encouraging developers to build cloud storage within their apps and offer a minimal amount of local storage.

3. Goodbye computer. One of the most common criticisms of iOS devices is that they’re not truly stand-alone machines: all of them require a computer connection to iTunes before you can get started. An iPhone dependent on connectivity for everything removes that criticism because it can be tied to an iTunes account in the cloud. Instead of device activation and synchronization requiring a tethered connection to a computer, it could be done over-the-air, much like Google Android (s goog) devices do, which addresses a long-standing iPhone user complaint.

4. Broadband is the processor. It’s no secret that Apple is building a billion-dollar data center in North Carolina, which collectively could take the place for a lack of storage in a smaller iPhone. I’ve called for iTunes in the cloud since December of 2009 (subscription required), and even though it’s not here yet, the idea can (and should) be expanded to MobileMe activities. By storing media, mail and other data points online, mobile broadband and the data center move computing beyond the individual capabilities of the phone.

5. Apple as MVNO? This is a bit of a stretch, but the idea of a smaller iPhone that’s more reliant upon Apple for data storage could allow Apple to earn additional data plan revenues from the carriers. It’s not impossible to imagine that users with a cloud-based iPhone would use more data that current iPhone owners. Knowing that, Apple could pitch plan-sharing deals to carriers, or even work out wholesale data plans to resell directly for additional profit, much like mobile virtual network operators do today. If you tie in both old and new reports of Apple working on an embedded or universal SIM, it lends credence to this possbility.

Obviously, none of these reasons verifies that Apple is working on or will offer such a cloud-based iPhone. We won’t know about such a device until or if Apple announces it, pending someone leaving an iPhone mini at a bar, that is. But I can see why Apple might want to sell one. Can you?

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13 Responses to “5 Reasons a Small, Cloud-Based iPhone Makes Sense”

  1. pk de cville

    “and the two most expensive components are the very ones that would be cheaper on a smaller iPhone with less onboard storage: the display and the flash memory.”

    I think you forgot the A4 motherboard? Apple will upgrade to the A5 chip for iPhone 5, but use the cheaper A4 in a GSM only model. And then one year later ship the A5 universal model. This will save another $25 or more in cost, don’t ya think?

  2. I thought the whole point behind smartphones (and PCs) for consumers was the value in having their desired information immediately to hand in a device that could allow the user to access and manipulate it, regardless of location – and not be a ‘dumb’ terminal relying on a mainframe, even if that is cloud-based. A little too ‘Back to the Future’, I think.

    Now granted, the iPhone (and Touch and iPad) are essentially content delivery devices relying on their sync to iTunes (and its store), but as noted in Comments, even if consumers are okay with that, does Apple really want to rely entirely on the vagaries of their wireless partners or available wi-fi?

    • No argument with your thought, but at some point there’s bound to be a paradigm shift. It might not be time for that just yet with a phone that relies more on the cloud, but I see potential merit in it when there’s affordable mobile broadband everywhere, i.e.: not quite yet. ;)

  3. This is dead-on. If Apple follows through with this, I think they will make a killing. I prefer large displays on smart phones. Right now, I own an iPhone 4. It is too small. I am praying they bump up the size to 4″ for the iPhone 5 this summer. If they don’t, I’m moving on to Android. However, if I do get my iPhone 5 in 4″ display size, I would definitely purchase a smaller iPhone “Nano” for my kids. They don’t need a full-fledged iPhone. I’m not paying all that money for them to enjoy a high-powered gadget like that. But I think they would definitely take me up on my offer if I told them that I would buy them a 3/4-sized iPhone Nano. Bring it on, Apple!

  4. What if the new device is an iPhone that doesn’t do 3G and so is basically an iPod touch with a phone included? Without 3G, the battery usage will be much lower and so the new device can be much smaller (look at how the thin the Touch is). Instead of making the device really thin, though, you cut off the chin and forehead. This would then be about half the size of the current phone. An iPod Touch is currently $229. Perhaps it would only contain 4gb to get the price to $200?

    This would also mean that Apple wouldn’t fragment iOS since screen size, speed, etc remains relative to the iPod Touch.

    The carrier now has a device for kids whose parents currently buy a touch and a phone for them. Plus, they have what may be a gateway phone for folks who don’t want a data plan – they purchase this phone, then realize how much they want to access their apps anywhere and so upgrade upon renewal. For Apple, they now have a device that can be sold in countries with poor 3G coverage or people who can’t afford a data plan.

  5. Hamranhansenhansen

    AppleTV is a Wi-Fi device, not 3G. It has a much bigger network that is more reliable and cheaper. And AppleTV is not only about the cloud, it is very much also about local network resources: iTunes Home Sharing, iOS AirPlay.

    I don’t know why anyone who is contemplating a smaller iPhone would look anywhere other than iPod nano for inspiration. Compare an iPod touch to iPod nano and you see how you make a smaller iPhone. There is a miniature phone running iPod OS and a version of the nano screen and a limited set of built-in apps missing from Apple’s lineup. Same as with the iPod touch versus iPhone, replace half the storage in the iPod nano with a phone: iPhone nano 4GB $199. An iPod-simple feature phone with the same 1000 songs from the original iPod. For a lot of people, that is a dream phone. Apple probably makes the device double the height of the iPod nano, and they probably call it iPhone mini. Apple can add features every year, porting them down from iOS, smartening the mini phone up, so to speak. They can add 3rd party apps in the same way iPod nano has Nike: just build them in. Facebook is an obvious candidate. Eventually, they put the OS X core in there and drop iPod OS.

    I also think iPod touch gets 3G this year and becomes an iPhone Lite. So an iPhone mini below that and iPhone 4 above and an iPhone 5 above that is a full range of price points and storage, $200-$800 unsubsidized, 4GB to 64GB.

  6. Maybe we should call this the Apple KIN? I think the cloud storage model makes sense for users.

    But Microsoft found out last year that from the carrier’s point of view, the constant server traffic turned even basic users into data hogs. This model lets the phone makers off the hook to keep upping the storage by throwing the problem over the wall to the carriers, who will have to build bigger pipes.

    One thing is for sure, if you like to play music or video you’re going to need more than a 2 gb data plan.

  7. And the one reason it doesn’t: Apple would never, ever sell a device that’s reliant on cloud-connectivity to be useful in an era when cloud-connectivity cannot be guaranteed.

    Apple doesn’t ship stuff that “kinda sorta works if the environment’s right”…