iPhone nano will not be a smart phone...just a way for people to replace their iPod and phone in one device.
Exactly. To distill the various comments made so far, my argument would be the following:
1. The Classic (& clickwheel) is out. Too big and bulky, not enough functionality compared to similarly sized/priced touch. The killer app is lots of storage. But most people have learnt how to manage playlists such that they don't require to carry around their entire collection all the time. In addition, the ubiquity of USB tiny flash drives has lessened the need for a any hard drive storage facility (did anyone ever use that?)
2. iPod Nano is the biggest selling ipod. The form factor is good, product is still seen as hip, but sales are on the downturn too. Why? Limited functionality compared to your phone that you *must* carry anyway. Even non-smart phones can play mp3, take photos etc etc. The itunes ecosystem may well be sustaining the ipod sales (a reverse of the original situation?) for the moment due to vendor lockin.
3. touch and iphone are cool. But they're too masculine physically for the majority of the addressable market. They're bulky, monolithic and wide. Classy, yes. But the market for classy chic is now saturated. The real latent market is the less well heeled who want an itunes capable device, want to be part of the apple owner's club. Currently they have to buy in ipod nano because that's the cheapest that makes sense. But it seems rather old fashioned compared to the iphone/touch. And they still have to carry an additional phone (which cost them nothing on a plan) that is increasingly feature rich (if not

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Enter the iphone nano. Obviously it's an ipod. It's small and sexy like a nano. It doesn't intimidate. It's cute. It's an entry level touch screen. But, due to smaller screen size issues (done to death in previous posts), and also to eliminate cannibalisation of touch/iphone, no AppStore. It's NOT compatible with iphone platform. Software is customised versions of phone app, sms, ipod etc built on the same OS. Of course it will be 3G (for Japan/Europe), but with no apps, no need for wifi or GPS. However, it *may* have a custom version of the Itunes Store.
The iphone nano acts as an introduction to the iphone world the same way that ipod was to mac. You trade up once you've had a taste of the touchscreen goodness. Perhaps at the moment, the leap is too great for those still in clickwheel land.
It's exactly the product Apple needs (apart from a fix for the laughable 24" LED display that can only be used by 3 models, and new mini
