Apple Inc. is hoping to make up lost ground in the worldwide smartphone market by developing smaller, more compact versions of the iPhone to compete with devices that run on Google Inc.’s Android software, the most popular operating platform in the last quarter of 2010.

Citing “people who have been briefed on the plans,” Bloomberg News is reporting that Apple has already produced prototypes of the new iPhones, which supposedly have lost the familiar “home” button and would be about one-third smaller than the iPhone 4.

Reportedly set to retail at around $200 (U.S.), the new phones would not oblige buyers to sign a two-year service contract, as is the case for most users of the devices subscribing to AT&T and Verizon Wireless now.

Bloomberg’s sources said the preliminary plan for the new devices includes a mid-year release, but cautioned the introduction could be “delayed or scrapped.”
A smaller, cheaper iPhone would aim to give Apple a greater edge in the competitive smartphone market, one currently dominated in the U.S. by devices that run on Google’s Android operating system. Android-equipped phones moved more than 32.9 million units in the last quarter of 2010, making their market share more than double that of Apple’s.

But any move to create a more affordable product risks eroding the value and demand of Apple’s premium products, notes Tim Shepherd, an analyst at high-tech research firm Canalys.

“There is an argument that it could be useful to have a low-end smartphone to compete at lower price points, but the problem is that they may erode demand for their higher-end products,” Shepherd told the Star. “In that case the previous iteration, the iPhone 3GS, becomes the lower-end device.”

Nokia’s Symbian is the second most popular smartphone platform, carving out 30.6 per cent of the market in the last quarter of 2010 with 31 million units sold. Apple is in third place with 16 per cent of market share, representing sales of 16.2 million units.

The success has left Google well placed for the future, as mobile phones are soon expected to become the primary tool used to access the Internet, above personal computers.

The worldwide smartphone market continues to be strong, with shipments in 2010 totally just below 300 million units, a growth of 89 per cent from the previous year.

“There are markets in the world where you’re looking at a situation where people don’t have access to personal computers and Internet traffic is primarily driven by lower-end smartphones,” said Shepherd, referring to India and China. “Apple could slash the price of the current iPhone in markets where there’s just not the disposable income required to drive sales. But I would be surprised if they would use an old product to do that.”

With the debut of the iPhone 4 last June, Apple discounted the price of the iPhone 3GS in the United States, offering the phone for just $49 if buyers signed up for a two-year contract.

Apple has declined to comment about any development of a new iPhone.