1. Screen Competition: In the past, iPhone Nano rumors have pointed to a smaller device that has a smaller screen. This is exactly the wrong direction for Apple. Every iPhone sold has shipped with a 3.5-inch display, which is now at the bottom of the smartphone barrel when it comes to size.
Most mid- to high-end Android smartphones ship with displays measuring more than four inches. Same goes for the bulk of Windows Phone devices. With the competition churning out gorgeous displays ranging from 3.7- to 5.3-inches, now is not the time for Apple to scale things down. Instead, Apple needs to make the next flagship iPhone bigger and keep its low-cost device the same size as the iPhone, 3G, 3GS, 4, and 4S.
2. iPhone 3GS: One of the arguments in favor of the iPhone Nano is that it would let Apple offer a lower-cost device to markets where price is more of an issue. The only problem is that Apple has consistently dropped the price of its older models. The iPhone 3GS, which is nearly three years old, is still available. AT&T offers it for free. Would an iPhone Nano sell for free? I doubt it. The one question is how much cheaper could Apple make the iPhone 4/4S once the iPhone 5 ships?
3. Lower Margins: Apple is a successful company because it is able to keep relatively high margins for its products as compared to its competitors. An iPhone Nano would have to be offered at a price point closer to the cost of materials. Given how much Apple spends on advertising, it is possible such a device would have narrow margins. This simply isn't in step with Apple's proven track record.
4. iPod Touch: The iPod Touch is still around, and can be scooped up for $199. It offers nearly all the functionality of the iPhone, minus the ability to make cellular phone calls. With the iPod Touch, developing markets already have the ability to put a cheap device that will run all the iOS apps out there in a compact and attractive form factor. An iPhone Nano could have a significant negative impact on the iPod Touch product.
This isn't to say Apple won't bring an "iPhone Nano" to market, but it probably won't follow the path many people currently have in mind. I'd believe Apple will offer a low-cost version of the iPhone 4 before I'd believe Apple will bring a smaller-screened device to market.
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