This week Apple announced it was cutting the price of the entry-level iPhone 3G (8GB) in half, from $199 to $99. This comes as part of the announcement of a new and improved iPhone 3GS, which will go on sale next week with new features (video, better camera, voice controls, etc) and more memory. One report I saw said that they hope the move will boost sales of the old iPhone as an entry-level smartphone for those that just haven’t been convinced to switch over from their old-school cell phones yet because of the cost. That article said Apple thought sales of the old version might increase as much as 50% because of the price cut.

It remains unclear (from what I could find about the situation) whether Apple plans on continuing the 3G phone into the future or if they’re phasing it out rapidly in favor of the 3GS. The way I see it, they’ve gone from 2 levels of product quality (3G 8GB and 3G 16GB) to 3 levels (3G 8GB, 3GS 16GB, and 3GS 32GB). Dropping your price 50% and selling 50% more output is not a smart move — you make half as much on each phone and sell 1.5 times as many units as before, so total revenue drops. But broadening your potential customer base is a smart thing.

Keep in mind, this comes right when Palm is releasing their new Pre phone, which looks to me like it might even be better than the iPhone — and I LOVE my iPhone. Running multiple applications at once, synching contacts between Facebook and Outlook are two things I wish my iPhone could do, and the Pre can do them and more — with a slide keyboard to boot.

So Apple steps up and improves the iPhone to compete with the new Pre, and in the process makes their other product more available to the less tech-savvy among us. This is consistent with their multiple iPod strategy — they come out with new ones but seldom wipe out earlier versions; they just drop the price on them to try to get late-adopters to finally purchase.

For a while, Apple’s multiple iPod strategy didn’t make much sense to me. I kept wondering why they would come up with all these different models — wouldn’t they just cannibalize their existing sales? They’ve got the Shuffle, Nano, Classic, and Touch, with multiple memory options for each and just about every color you can think of. Why so many? What they’re doing is flooding the available market space with every possible product anyone might want, much like the three dominant cereal companies (General Mills, Post and Kellogg) come out with every kind of cereal imaginable (Strawberry-Banana Cheerios? REALLY?). That way, there is no room for competitors to find a niche and gain market share. This iPhone move is much the same, and even if total revenues from the 3G will fall, it may still be a smart move when you look at the strategic component of it. (Not to mention the increase in App Store revenues if a whole new slew of people get their hands on iPhones…)

In a good Time magazine piece on the Pre, Palm says they’re not trying to steal anybody away from Apple. They insist that with only around 10% of cell phones being smartphones, the market’s big enough for everybody. We’ll see. And if the market keeps expanding, expect Apple to come up with yet another version to fill yet another niche in the market.

(Part 2 will focus on the new iTunes pricing strategy, with 3 tiers of prices.)