Apple is too busy working on the iPhone 5, the New York Times reported, to work on a second, smaller version of the iPhone. Apart from that, the Times said, a smaller iPhone Nano wouldn't necessarily be less expensive than the full-sized one, and would require app developers to re-write their applications to work on a smaller display.
Smaller components aren't necessarily less expensive than larger ones, and it takes more engineering chops to stuff parts into a smaller chassis. That means a smaller iPhone could have a much longer development time requirement than a larger one. A longer development time frame might lead to a more expensive device.
The screen size issue is a serious one, too, and has painted Apple into somewhat of a corner. When the original iPhone was launched in 2007, it had a 3.5-inch display. At the time, that was as big a screen as any device on the market. Times are different now. Many of the Android phones on the market are pushing display sizes well in excess of 4 inches. Despite the amazing quality of the iPhone 4's Retina Display, it is now significantly smaller than the competition's best phones. That puts the iPhone at a slight disadvantage.
Why not go bigger or smaller? Apps. Changing the screen size, aspect ratio and/or resolution will impact applications for the entire iOS community. There is a reason that Apple exactly doubled the resolution of the iPhone 4 (from 320 x 480 to 640 x 960): This made life a lot easier for developers.
These are both believable arguments. Apple produces just one phone per year. Giving itself a development cycle of about 12 months means Apple has to work swiftly to make the changes for each successive model. Also, it's fair to consider that Apple has spent a significant portion of the last 6 to 12 months working on the CDMA version of the iPhone for Verizon Wireless.
(Verizon Wireless told me that the carrier performed drive tests with the iPhone 4 for an entire year to assure solid network performance -- in addition to Apple's own drive tests.)
Additionally, Apple already has a lower-cost option for people. AT&T sells the 8GB iPhone 3GS (which debuted in 2009) for $99. That's half as much as the 16GB iPhone 4, and at sub-$100, an attractive buy for many budget device seekers. This June, when Apple introduces the iPhone 5, it will likely discount the iPhone 4 to a cheaper price point, continuing its tradition of offering last-year's model at a bargain price.
Bottom line? The Times' anonymous sources said that Apple isn't planning to bring a smaller iPhone -- aka iPhone Nano -- to the market any time soon.
Personally, I'd love for Apple to increase the size of the iPhone's display, even if by half an inch to 4 inches.