iPhone nano to replace iPod nano

This is purely based on my analysis of the market situation and recent rumours.
If you enjoy such speculations, please read on, and please post your opinion. :-)

Apple will replace the iPod nano line with an iPhone nano lineup at existing price points

The device
Instead of a touchscreen like the iPhone, it will use a back-illuminated touchpad that can function as a "clickwheel", "number pad" or "text pad" interface. It will have GSM, no SIM lock and be world-wide available immediately.
It will not have: A touchscreen, bluetooth, WiFi, edge, MMS, camera, Internet capabilities.

Why would Apple do this? - The Threat
Cheap mobile phones with built-in MP3 players that are "good enough" to keep owners from adding a separate iPod.

Alternative 1: Normal iPod updates
An iPod line update as usual. However, this does not address the threat: An incremental update on the iPod lines will not be enough to keep mobile phones away much longer.

Alternative 2: iPhone nano with Touchscreen
Basically a smaller version of the iPhone (Ireland). This option would be much more expensive and thus not address the threat: The threat comes from low end "good enough" phones in the hands of millions. A provider-locked, expensive cellphone is not suitable for addressing this threat. I am also concerned about the usability of a touchscreen (esp. keyboard) at smaller dimensions than the current iPhone.

Feasability
The price difference (retail) between a 4GB nano and a 4GB Sandisk has gone to 100$, which indicates a very high margin for Apple on the iPod nano at the moment, and at least 50$ "room" at current price points for added features. Adding a loudspeaker, a microphone, a GSM chip, a SIM card slot and a backlit clickwheel/touchpad area would cost less than 50$ in manufacturing. Therefore, it is really feasible to do this. (melgross pointed out phone components might be more expensive. Also, the nano would get too thick.)

Potential Impact
In one big swoop (Christmas) Apple would get roughly 8-10 million iPhone nanos into the market. The entire threat of mobile phones replacing iPods would be gone forever. Now, iPods would start replacing mobile phones.
At the same time, the market destruction of stand-alone mp3 players would be initiated by the same company that made this market successful.

The relevant market segments in this scenario:
Normal Phones: Low-end bottom of the market, generally uninteresting, cost-driven segment
MP3 Phones: iPhone nano as described as new leader in this segment, Apple initiates rapid expansion here
Nano-like MP3 players: Quickly cannibalised by iPhone nano and other MP3-phones, rapidly declining market segment
High-end MP3/media players: Still viable segment, ruled by updated iPod Video

Basically: People would stop caring about phones without players or players without phones.

Instead of waiting like a sitting duck for potential cannibalisation by handset makers, Apple would cannibalise itself and come out the winner.


Potential problems
One problem I could see is that Sandisk and Microsoft could take over a still lucrative "iPod nano" market segment while Apple fails to make inroads into the handset market with an iPhone nano as described here: Customers view it as too expensive for an MP3-player and not featured enough as a phone. [December suggested addressing this with keeping existing nanos at lower prices]

Duddits/Ireland are pointing this out:
This move could dilute the iPhone brand, as "iPhone" currently stands for "high-tech, multitouch, glamourous phone". Also, Apples distinct advantage in the handset market is the OSX-multitouch combination (Ireland).
Along the lines of this, it could also lead to a backlash from carriers who just signed expensive iPhone contracts, if Apple releases a provider-free phone.


What do you think?
(I will update this thread if a new idea/problem surfaces)

While I think you are right on the OSX/multitouch advantage and the iPhone branding, I think it would not address "the threat" appropriatly.

A multitouch nano (assumingly provider-locked) would be too expensive for most users. I believe Apple needs to rapidly get a large piece of the market in MP3-phones. If they don't, the iPhone might be very popular in the future, but mid-term they will loose their dominating role in music to the handset makers, when all contracts are renewed with free 2-4GB players, nanos will be left at home. iPhones might be admired, but not bought by most people.

So, now that there's more information I wanted to update this topic:

This is from an analyst:
"Surprisingly, iPod ASPs remain flat at $160. This is evidence that the digital media player market remains healthy."
If that's the case, this would be a strong argument for not meddling with the iPod nano line too much. If people are still picking up iPods at 10 Mln/Quarter, the cannibalisation by low-end handsets cannot be that big. This alone would lead me to assume that Apple would push the move I described back by at least two quarters.

Also, in the conference call, Apple (Tim Cook?) noted that they are planning to slowly build and expand their iPhone business, as they did with the iPod before - which also doesn't point to a radical and bold move.

The longer they wait (or can wait), the more feasible an iPhone nano based more on the iPhone than on the iPod nano becomes.

In summary, the chances of my theory happening have just gone down on strong iPod sales, Apple comments.