There have been rumors for some time that Dell was developing a smartphone or smarphones plural. But the Wall Street Journal reports this morning that a Dell "mobile Internet device" (MID) based on Android will be released later this year:

Engineers at Dell Inc. have been developing a pocket-sized device for tapping into the Internet, said people familiar with the company's plans.

The gadget would run on Google Inc.'s Android software, these people said. Two people who saw early prototypes described the device as slightly larger than Apple Inc.'s iPod Touch, which is similar to the iPhone but does not have cellphone capabilities.

Another person who was briefed on the company's plans said Dell may begin selling the device later this year, though this person said the plan could be delayed or scrapped entirely.

An Android based smartphone might simply fade into the sea of Android devices now coming (unless it was very aggressively priced). But a pocket-sized Internet device that might also be able to make calls (via Skype, etc.) is more interesting and has potential to sell. It could be positioned as a Kindle competitor but with a better Internet experience. If priced right something like that could generate significant demand. 

The issue in that hypothetical scenario would be the IP connection. Dell would either need to hook up with a carrier and do a deal, like the HP or Acer deals with Verizon and AT&T, or embed a connection as Amazon has done with the Sprint network in the background. Dell could potentially cover the network costs by simply passing them on to the consumer, without any margin. If those costs were cheap enough you'd probably find a fair amount of demand.

But this is the challenge in my mind with such a device or all MIDs: how to ensure that consumers would have mobile Internet access from the beginning, in a simple and cost-effective way.