The rumor about Apple launching a Cheaper version of iPhone, which was bandied out early this year, is getting stronger. The latest rumors suggest that Apple will launch a "low-cost" iCloud iPhone soon.

Trevor Sheridan wrote in Apple'N'Apps that the scenario of Apple launching a cheaper iPhone looked plausible enough. His sources told him the new version, likely to be unveiled along with the iPhone 5, would be free with a two-year contract.

The report said Apple could cut prices by slashing the on board Flash memory. A breakdown of supply costs of iPhone parts shows that the storage accounts for 15 percent of the total cost to build an iPhone. Reducing 15 percent of the cost across millions of units is a substantial savings, it points out.

"The iCloud model will be for users who will want to use the iCloud heavily for storage, and keep a lot less on the iPhone itself. This will also help Apple make iCloud a feature by itself and reason to use the entire Apple ecosystem," says the report.

The idea of a cheaper iPhone looks good, considering the fact that its Android OS-based rivals have flooded the market with smartphones far cheaper than the iPhone. Analysts agreed that launching a lower-priced iPhone to emerging markets would be a good strategy to exploit the market as top-of-the-line iPhones are seen as prohibitively expensive in such markets.

There were rumors in April that Apple could launch a stripped down "iPhone Mini". This would be a streaming-only phone with much less storage capacity than the regular iPhones. A VentureBeat report explains that the iCloud iPhone could be significantly different from the streaming-only device.

The report says iCloud is not exactly a streaming service as files are synchronized and fully downloaded from iCloud, not streamed. That means Apple will have to allow for about 8GB storage in the rumored iCloud iPhone.

The rumor mill suggests that device will not feature expensive glass rear and antenna band and that Apple is eying to make it available for $400. At this rate, carriers will be able to offer the phone to users at zero cost, under a two-year contract.

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