Apple is currently working on the iphone that is one third smaller than the iphone 4. Bloomberg says that, "Apple is looking at laungching the 'chearper' model at $200 off contract, which would be the same as the 16 GB iphone 4 ON contract currently. Let's not understate the fact that $200 off contract is dirt cheap by modern smartphone standards, which means Apple would have to be using every scrap of its enormous economies of scale to pull that off." The 3.5 inch Retina Display would vanish entirely. Even though it is going one third the size it will still be a bit large for a "smaller" phone either way. Apple is also working on a "Universal SIM" that could potentially eliminate SIM cards altogether. It is however difficult to say if Apple is actively working on it or already has been shelved, as rumors that pass through the grapvine can get twisted.
http://www.engadget.com/2011/02/10/bloomberg-apple-working-on-cheaper-smaller-and-dual-mode-iph/?icid=engadget-iphone-url
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