Apple unveils cheaper next-gen iPhone

New device will sell for as little as $199

SAN FRANCISCO -- Apple on Monday unveiled a next-generation iPhone with faster Internet access that will run on advanced wireless networks and sell for as low as $199 -- half the current entry-level price.

Shares of Apple, after strong recent gains partly driven by anticipation of the new iPhone, fell 2.2% after CEO Steve Jobs indicated the company was going after the mass market with the new model.

"It changes the game for all smart-phone makers," Tim Bajarin, head of consultancy Creative Strategies, said of the price and new features.

The new phone also marks a dramatic departure for how Apple will make money in its third major business alongside Macintosh computers and iPod media players.

Wireless network companies will no longer pay Apple part of the subscription fees they get from iPhone users, but instead will subsidize the devices up front to make them cheaper.

"The vast majority of agreements we have reached do not have those follow-on payments, so you can conclude that the vast majority of carriers do provide subsidies for the phone," Apple COO Tim Cook told Reuters.

Cook declined comment on how the new arrangement would affect Apple's profit margins, but AT&T, the exclusive U.S. carrier for the iPhone, said the subsidy would hurt its earnings and margins through next year.

Improved e-mail features for the iPhone are intended to woo business people, while its ability to run on faster networks is key to Apple's push to gain market share in Europe and Asia.

"It's amazingly zippy," Jobs said, showing off the encore to a device that melds a mobile phone, iPod media player and Web browser, nearly a year after the original went on sale.

The new iPhone, which looks similar to the old one but with glossy black or white plastic in place of a metal back cover, loads Internet pages about 2.8 times faster than the original, he said.

An entry-level version of the new iPhone, with 8 gigabytes of memory, will cost $199, versus $399 for an older-generation iPhone with similar memory. A version of the new iPhone with twice the memory will cost $299. Both will go on sale in 22 countries on July 11.

"This positions Apple well vis a vis other smart-phone competitors such as Nokia and RIM," said Shannon Cross of Cross Research. "IPhone is no longer an expensive device. It's now priced at the mass market."

Shares of Palm Inc, maker of the rival Treo smart-phone, fell 4%, but those in Research in Motion, maker of BlackBerry devices, rose 2%.

The new iPhone will run on third-generation (3G) wireless networks and includes satellite navigation capability, Jobs told developers at a conference in San Francisco.

A new service, "MobileMe," will automatically send e-mail and other information to iPhones, similar to Microsoft Corp's Exchange e-mail server product. The pay service will replace Apple's .Mac service and offer Web applications intended to make the phone work more like a desktop computer.

"It clearly puts them in a competitive position on the services side against Google, Microsoft and most importantly Nokia," Ben Wood, research director of U.K.-based CCS Insight, said of MobileMe.

Jobs said Apple has sold 6 million iPhones so far, and Cook said he was "still very comfortable" that the company would hit its goal of selling 10 million units by the end of 2008.

Apple shares closed at $181.61 on Nasdaq. Before Monday's fall, the stock had risen more than 50% in the past three months, primarily on strong demand for Macs and iPods, as well as anticipation of the new iPhone.