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MobileMe logoRumors that Apple is working on a smaller and cheaper iPhone show no signs of stopping anytime soon — now the Wall Street Journal has reported a potential “iPhone Mini.”

The paper also reports that Apple may make its MobileMe service — which currently costs $99 a year — completely free, and that the service may serve as the basis for its long-rumored cloud iTunes offering.

With both Bloomberg and the WSJ reporting the coming of a smaller iPhone, we can reasonably assume the rumors are true. The smaller iPhone, which we’ll just refer to as the iPhone Mini for now, will be somewhere between half to two-thirds the size of the iPhone 4. According to the WSJ, the iPhone Mini will be available to carriers at half the price they pay for the full-size model, which would allow them to offer it for free, or drastically well below the typical $200 price with a two-year contract.

Offering a smaller, cheaper iPhone would allow Apple to compete with cheap Android devices like LG’s Optimus One, as well as open up an opportunity to sell iPhones to emerging markets.

It’s unclear when Apple would unveil the iPhone Mini, but the best bet is for it to come alongside the iPhone 5 this summer. Alternatively, it could debut in the fall so as not to steal the spotlight from the next-generation iPhone but be ready for the holiday season.

As for MobileMe, Apple’s service that offers file, calendar and contact synching across Mac desktops and mobile devices, Apple’s been expected to make it free for a while now. Aside from MobileMe’s 20 gigabytes of online storage, most of its features can be found free elsewhere. Apple also recently made its Find My iPhone feature free, which lets users locate their lost devices; that feature used to be available only to MobileMe users.

According to the WSJ, the revamped free MobileMe could serve as a “digital locker” for users’ personal media, like photos, music and video. It could also be the way users access their iTunes music purchases as part of its eventual cloud-based iTunes service.

The free MobileMe, which is expected to launch this summer, would give Apple a way to unify its many devices and computers. It would be a standard feature on the iPhone and iPad and would also help make up for the difficulty of sharing documents between computers and mobile devices. And with Google reportedly working on a cloud-based music service of its own that’s heavily integrated with Android, Apple no longer has any choice in the matter — MobileMe needs to be free, and it needs to offer similar integration with its mobile devices.

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