Could a free iCloud iPhone accompany the iPhone 5? Maybe

Apple could be gearing up to release a low-cost “iCloud iPhone” alongside its flagship iPhone 5, in coming months, according to the site Apple’n’Apps.

Several unnamed sources told the site that Apple has quietly been putting together a low-cost iPhone that would be free with a two-year contract. The iCloud iPhone could potentially use much of the internals from the iPhone 4 while sporting less on-board memory for storage. As a result, the device would force users to keep most of their data on Apple’s iCloud service for storage rather than the device itself.

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This isn’t the first time we’ve heard talk of a stripped-down, low-cost iPhone coming this year. Back in February, we reported on a rumor that Apple was working on a streaming-only “iPhone Mini,” something that I shot down as complete crazy talk because it seemed way too soon for Apple to give up on local storage entirely.

At the time, I wrote about a slightly more likely possibility for a stripped-down iPhone:

The iPhone Mini (or Nano, or whatever) could have significantly less storage than a typical iPhone. Most likely 8 gigabytes of storage — the same as the lowest end iPhones right now. Apple won’t prevent users from storing their own content, because that would be crazy. But since it has a small amount of memory, Apple will likely push the ability to stream media via MobileMe as well.

That basically seems to be what’s described by today’s iCloud iPhone rumor. We know that iCloud isn’t exactly a streaming service — files are synchronized and fully downloaded from iCloud, not streamed — which tells us that Apple will still need to include some sort of storage on board the iCloud iPhone. 8 gigabytes of storage, the same as Apple’s current low-end $50 iPhone 3GS, seems like the bare minimum necessary for a modern iOS device.

Apple is reportedly trying to get the cost of the purported iCloud iPhone down to $400, which would allow carriers to offer it on contract for free, Apple’n’Apps blogger Trevor Sheridan writes. The company will also move away from the expensive glass rear and antenna band from the iPhone 4 to cut costs on the device.

An iCloud iPhone would be a fundamental shift for Apple, which has generally expended as little effort as possible on its low-end offerings by discounting older generation iPhone models.

But I wouldn’t count it out entirely. Hitting the magical price point of free would be a major score for Apple, and the device would also attract even more consumers to iCloud, which would help Apple compete against Google and Amazon’s cloud storage offerings.