"We believe that iPod Nano will be converted into a phone because it's probably the only way for Apple to launch a lower end phone without severely cannibalizing iPod Nano,"
You know, this part of the argument does make sense. A number of people have pointed out that the $5-600 iPhone isn't viable in the long term, it's just not the case that most people are going to be willing to spend that kind of money, especially in an environment in which most people are used to spending no more than $100, and frequently nothing at all, on a new phone.
On top of which, the iPhone itself is somewhat large and generally not appealing to everybody.
There are two real options: The first is that Apple doesn't care, they'll just take the high-end consumer phone market away from... who has that now, Nokia? And they'll stay there, producing minority interest expensive (but arguably worth it) devices much as they did in the computer industry.
The other is that Apple will want to grow their phone business, and if so they do have to produce devices that are considerably cheaper than what they offer today. Cutting the price of the iPhone would be an interesting move, but it starts to make the iPod nano look seriously over-priced the lower it gets.
I'd imagine that Apple has plans to launch a range of phones in the next year. I'd be surprised if higher capacity devices aren't released, replacing the current iPhone at the same price point. And I'd be surprised if a much smaller iPhone, possibly one that eschews the multitouch interface and much of the iPhone functionality, at a much lower price, doesn't also come out.
We will probably see the OS X iPods first though. Hopefully those will give us some clue as to where Apple is thinking...