Can Apple Keep a Shine on the iPhone?

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Of course, some consumers who already own an iPhone could choose to keep that device and switch carriers instead of upgrading to save costs. One option is Zer01 Mobile, a carrier that will introduce its mobile service in early April and will be sold through large electronics retailers. The company offers an unlimited voice and data plan for $70 a month, including taxes—with no contract. Unlike AT&T, Zer01 doesn't cap monthly downloading at 5 gigabytes, roughly equivalent to two standard-definition movies. The company encourages users to use their smartphones as modems for laptops and to download as much music and video as they like. While Zer01 will start out supporting only Windows Mobile-based devices, the iPhone will be added within several months as the company strives to grow to 1 million users in its first year. Because iPhone owners are heavy multimedia and Web users, "we feel that a lot of the iPhone users more than anyone else might migrate over," says Zer01's CEO Ben Piilani.

Could An iPhone Nano Be Next?

As a result, Apple and AT&T may need to get more aggressive on price. Today an 8-gigabyte iPhone sells at Wal-Mart (WMT) for $197 with a two-year contract. To appeal to a broad swath of consumers, a phone may need to cost $50 with a two-year service plan, says Mace. Hitting that price target may be tricky, since according to researchers at iSuppli, the iPhone cost $172 to make as recently as a year ago—though component prices have since plunged.

Alternatively, a smaller, lighter iPhone model—an iPhone nano, if you will—would cost less and mirror the evolution of another best-selling Apple hardware product, the iPod music player. The original iPod Classic was launched in 2001. Three years later the company launched offshoots called iPod Mini and iPod Photo. A year later the iPod nano was born, followed by iPod Touch in 2007. Sooner or later, Apple is bound to splinter the iPhone into a slew of wireless products with varied capabilities offered at different price points. Perhaps a new, cheaper iPhone could have a smaller screen and be operated via voice. Or it could be a multimedia-focused cell phone, designed especially for listening to music, snapping videos and photos, and for social networking.

Another option: AT&T may need to reduce the price of its iPhone service plan. To sign up users in this economy, carriers need to figure out a way to charge people $10 to $15 a month instead of as much as $30 for Web access, says Charlie Wolf, an analyst with Needham & Co..

Wolf believes the lead Apple currently enjoys in software and the popularity of its App Store may allow the company to hold off on introducing cheaper iPhone models for a while longer. As the number of applications found in the App Store continues to balloon to the tune of 500 new applications added weekly, Apple could gain even more traction by starting to recommend applications to users, similar to the way Amazon's recommendation engine can suggest books you might like based on your past purchases.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.