Bloomberg is reporting that Apple is working on building a smaller, cheaper version of the iPhone that they could sell for $200 off-contract. The supposed rational is that Apple needs to do this to compete with the wave of cheap Android handsets flooding the markets. This... is complete fiction. Bloomberg's ability to cite "people who have been briefed on the plans" is hardly impressive. That lack of accountability is always suspect, even when it involves something remotely likely. This is nothing more than a recycled rumor from 2008 and 2009 that Apple would released a cheaper "iPhone nano." The justification was that the iPhone is too expensive. Is the iPhone too expensive? Has its growth slowed in any way? Did Apple not just say in their last earnings call that the only limiting factor in sales was their ability to make enough iPhones? Head over to Asymco, the dynamite analytics blog by Horace Dediu, and have a look around. It doesn't seem as if Apple is doing anything but running away with sales.
Apple in the "second era" of Steve Jobs is a company solely focused on the high-end and the best products possible. A cheaper iPhone does not fit into the identity of Apple. Furthermore, to what purpose does a $200 unsubsidized iPhone serve Apple? They already make the iPhone available for $200 to consumers with carriers subsidizing $400. Yes, this would turn a carrier subsidy into a free iPhone, but what exactly is the margin in a $200 iPhone? Apple makes their money on hardware, not the App Store. If there's one thing Apple has proven, it's that they can print money by not compromising and attacking the high end.
Furthermore, a cheaper iPhone does nothing more than potentially fragment the iOS ecosystem and hurt Apple's brand. That anyone would adopt this story as plausible is embarrassing. Consider this portion of the Bloomberg article:
While Apple has aimed to unveil the device near mid-year, the introduction may be delayed or scrapped, the person said. Few Apple employees know the details of the project, the person said. Apple often works on products that don’t get released.
The prototype was about one-third smaller than the iPhone 4, said the person, who saw it last year.
That sounds like a good way to hedge your bets if you're Bloomberg and you're publishing the story. Maybe some device was floating around Apple, but "one-third smaller?" Why? Maybe the reason few Apple employees know the details of the project is because it's not going to happen in the way that this article implies. There is no advantage to Apple trying a low-end market grab. They operate on high margins, premium products, and and unassailable brand. Anyone who tells you differently doesn't know Apple.