But can the company even build one?

That seems a daunting task, particularly if the intent is to reduce the cost of the device to the point where carriers could subsidize most or all its retail price, while retaining the features that make it uniquely an iPhone.

In other words, can Apple build a mass market iPhone that is still an iPhone?

Needham analyst Charlie Wolf doesn’t think so. “Apple’s designers and engineers would have to pull a rabbit of a hat to accomplish it,” he said, noting that simply reducing the iPhone’s size isn’t really a viable option. “Such a move would dramatically reduce the value of the iPod module for video viewing as well as the size of Web sites accessed through the Safari browser. A smaller screen would also degrade the experience in using some applications.”

Other strategies, like drastically reducing the iPhone’s internal storage, wouldn’t do much good either. Going from 16GB to 4GB would reduce the device’s bill of materials by only about $30. And even if Apple were able to whittle it down further, margins on the device would likely drop to an unappealing level for a company that is accustomed to high ones.

“Bottom line, Apple has a delicate balancing act on its hands,” said Wolf. “It could modestly reduce costs and the iPhone would still be an iPhone. Going beyond that, the iPhone would no longer be an iPhone.”

That’s a reasonable argument if you assume Apple’s strategy is to reduce costs by removing things from the current iPhone.

But what if the company’s strategy is to build an entirely new iPhone for the prepaid market? What if it were to build a feature phone version of the iPhone, one with a mass-produced chip, a lower resolution screen, less on-board storage and no app store, just a handful of built-in apps? That seems a hell of a lot easier than painstakingly removing features from the iPhone 4 or 3Gs to the point where it’s suitable for the prepaid market. And as many an analyst has pointed out a lower-tier iPhone–one free of the required $70+ a month voice-and-data service plan–could be quite the bonanza for Apple.

PREVIOUSLY:

• IPhone Price Drop Could Give Apple Big Lead in China
• Rich Fanboi, Poor Fanboi–Apple Mulls Upside of Going Down-Market
• Analyst: Cheaper iPhone Would Be a Bonanza for Apple

[Image credit: Unwired View]

A couple thoughts: Odd, isn’t it, that we’ve seen two stories on an Apple/Verizon deal in as many days in two major news publications? They are presumably well-sourced and bullet-proof. Could be that “people familiar with the matter” are Apple execs simply using the media to put the screws to AT&T (T) in advance of the two companies’ iPhone contract renewal negotiations.

Or is it something else?

Perhaps these pieces are the first signs of the Apple’s cunning PR machine ramping up for some big announcements this summer. An Apple tablet/e-book reader is likely different enough from an iPhone that it wouldn’t interfere with AT&T’s exclusive deal on the device. And what of that “iPhone light” mentioned in the BusinessWeek story? Could it perhaps be an iPhone LTE? Or rather iPhone LiTE? A new device designed for the LTE (long term evolution) standard Verizon will begin supporting widely right around the time AT&T’s exclusive iPhone deal expires?