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Dell engineers are developing prototype devices that resemble Apple's iPod Touch but are slightly larger and lack cellular capabilities, according to a news report, citing unnamed sources. Dell will begin selling the Internet access device later this year, though the plan could be scrapped.

The prototype devices are powered by chips designed by Arm and run the Linux-based Android OS, the news report said. Most handheld devices, including smartphones, use chips designed by Arm.

Dell declined to comment about the device, saying it didn't comment on rumors and speculation.

If the rumor is true, it will be the first entry by Dell into a category of devices called mobile Internet devices (MIDs), which combine the attributes of smartphones and netbooks in a pocket-sized machine. However, MIDs have had trouble finding wide adoption, with users complaining about the small screens and poor battery life.

It is possible that Dell is developing an MID, but it may not see the light of day, said Jack Gold, principal analyst at J. Gold Associates. Dell relies on volume sales, and entering an experimental product category like MIDs would be a risky move, he said.

"The MID takes them into a different space than the traditional PC installed base. Netbooks would be closer to what they are selling," Gold said.

Selling MIDs would be similar to selling smartphones, so Dell would need significant partnerships with wireless carriers who provide Internet access services like WiMax, Gold said. It would also need strong partnerships with companies like Intel, which is pushing WiMax, to subsidize the hardware.

Dell's limited smartphone presence could hurt its attempts to sell MIDs, and it may be better off reselling devices from other companies than making its own.

"There's so much stuff in the market. Even Hewlett-Packard's having trouble selling their smartphones," Gold said.

This is not the first rumor surrounding Dell working on a mobile device. Dell has been rumored to be looking at smartphones, with speculation reaching fever pitch earlier this year when rumors surfaced of Dell showing an Android-based smartphone at the GSMA Mobile World Congress show in Barcelona. However, the phone never materialized.

It is important for Dell to do its research around MIDs, as the wireless space isn't about cell phones alone anymore, said Jeff Kagan, a wireless industry analyst. With wireless options like WiMax growing in popularity, hardware companies like Dell and Apple want to reach out to new users with wireless devices in new form factors, he said.