The more i think about this the more i think this wont be happening.
Firstly,
App-rewrites, developers would need to seriously go through their apps or make a nano version of them. Unless Apple has found a magic tick box that does all the hard work, a beta program is a must!
secondly,
The whole "cheaper" non-contract viewpoint, Apple already releases the iphone on pay and go in some countries, no point for making a "payg specific" phone when they have one!
Thirdly,
The "selling point" for developers when making apps is, text, email, camera, gps, 3g etc are all available in the API, do you think Apple will want to remove these features, thus ruin their SDK? Is there was an iphone nano, form factor will be the difference as well as memory.
The Ipod nano does what the classic does, only smaller. Same with a iphone nano.
Why would apple remove 3g?! Marketing diaster, other payg phones have it. Their whole iphone 3g marketing will go up in smoke...
"Introducing the iPhone nano.. 2g" eh no! BIG step back not happening.
While i dont rule out a iphone nano in the future, guys we must remember Apple wont scale back they will only alter form factor. However increasing the resolution and changing the dpi will ruin the apps size and will seriously screw the display. Apple go for detail, the icons will be bigger or the layout re-arranged, however this would have seriously impact on the sdk.
While an iPhone nano would be nice, Apple wont make one for the sake of it and i cant imagine them downgrading any features. The cell phone market is a lot more hostile than the mp3 market. The iphone 3g hardware (accept the graphics) already can do with improvements in this fast-paced market. IF anything the iphone nano will innovate rather than take away.
Fourthly,
Taking out the app store? no! Apple removing a source of income from the phone yeh right!
my 2 cents.
