According the today’s Wall Street Journal, Apple is working on a small, less-expensive iPhone. I think this makes perfect sense. Now that you have the option to obtain service from Verizon in addition to AT&T, nearly any employed person that really wants an iPhone already has one or is buying a new one soon. The only cost consideration is how much memory to pay for, not whether they can afford the phone itself. And Apple would love to go after the lower-end Android market and deepen their market penetration.

I see two markets for this new smaller and cheaper iPhone:

1. The frugal tech person. They want a smartphone, but wouldn’t spend $199 on an iPhone. Nothing against the iPhone itself, but they see it as just another smartphone option. They’re not true Apple believers. But if it’s free (with a 2-year commitment) they’d grab one in a flash.

2. High school/college students on a tight budget. Most students really want an iPhone (not Android), but they’re stuck for now doing heavy-texting with cheap phones. Although they can probably scrape up the extra monthly data charge, they can’t convince Mom and Dad to spring for today’s $199 iPhone purchase, since they’re used to getting a free phone every two years. These students (parents?) will definitely want a free iPhone. This will be a huge market.