The iPhone will soon be $200 cheaper and come with satellite navigation and faster Internet access, but it will be pricier to own because monthly service charges are rising.
Analysts have said Apple needed to slash the multimedia gadget's price and upgrade it to work over so-called 3G, or third-generation, wireless networks to hit the company's target of selling 10 million iPhones by the end of 2008.
An 8 gigabyte model is to sell for $199 starting July 11. A 16 gigabyte model will cost $299. The devices are to roll out initially in 22 countries.
Apple has inked deals for wireless carriers in a total of 70 countries to carry the new iPhone.
The iPhone is in increasingly direct competition with Research in Motion Ltd.'s BlackBerry and Palm Inc.' Treo smart phones, and the new iPhones' support of Microsoft Corp.'s Exchange software will help Apple steal market share within corporations.
AT&T Inc., the exclusive U.S. carrier for the phone, said its plans for the phone will start at $39.99 per month, plus $30 for unlimited data. That works out to be a $10 increase from the cheapest plan for the first-generation iPhone.
AT&T also warned of an earnings hit due to the pricing, pointing to carrier subsidies as the reason for the price cut, rather than a price reduction from Apple. The news sent the carrier's stock down sharply. It closed down 65 cents, or 1.70 percent, at $37.56.
AT&T put the cost at 10 cents to 12 cents per share for this year and next, or roughly $600 million per year.
Carrier subsidies for expensive phones are usually around $200 each, and the cheapest model of the first-generation iPhone sold most recently for $399. That points to AT&T expecting to sell about 3 million of the new iPhones per year.
AT&T expects the new iPhone to add to revenue in 2010, since the carrier will no longer be required to share monthly subscriber revenue with Apple. Analysts had estimated these monthly payments at $10 to $15.
The dissolution of the revenue-sharing deal is the end of an experiment. Apple and AT&T are now adopting the standard model for the phone business: The carrier pays the handset maker for the phones, then subsidizes the phones to consumers in exchange for a two-year contract.
Consumers will be the winners in the short term as the price of the feature-rich iPhone is cut in half. But they will be paying more for their AT&T service.
Apple said in a regulatory filing that under most of its new carrier agreements, it will not receive a share of subscribers' monthly service fees, as has been the case with the first-generation iPhone.
Apple's participation in the cell-phone market has been hurt by complaints about the year-old iPhone's data download speeds, which can make simple tasks like sending pictures over e-mail or downloading Internet videos painfully slow.
Apple said the 3G iPhone downloads data twice as fast as the old one.
Apple Chief Executive Steve Jobs said that when the original iPhone was designed, the chips used on the faster network sapped too much battery life and were too bulky. The company decided to wait to improve the device until better chip technology emerged that could fit the iPhone's slim design.
The addition of global-positioning technology improves the iPhone's accuracy in locating users. Current versions use a combination of cell-phone towers and Wi-Fi locations to help users figure out where they are.
Jobs showed off the phone at Apple's Worldwide Developers Conference in San Francisco. His announcements were widely expected.
Apple said it had sold 6 million iPhones since the first model was launched nearly a year ago, and 700,000 since March. That points to a steady slowdown in sales from the fourth quarter last year, as customers have been waiting for the 3G version.