A number of stories appeared this week suggesting that Apple will be releasing a small ‘nano’ version of the iPhone. It’s not the first time these rumours have been around, but the story this week was started by a report by Bloomberg. They indicated that Apple are looking at a cheaper, smaller phone to beat off competition from Android. The report was based on an anonymous source (Apple rumours are always anonymous), who had seen the smaller, nano-style phone which apparently had no ‘home’ button (very unApple).

In some ways it seems logical that Apple will release a Nano iPhone. They have a 5% share of the global mobile phone market, so there is plenty of room for improvement. There is increasing competition from manufacturers such as Samsung and HTC who are matching Apple for quality, but fulfilling the lower-end smartphone handset market. The iPhone 4 is a premium product, and the price means that there are many people who can’t afford it. Whilst Apple has success in certain markets such as the US and Western Europe, they face stiff competition in regions such as Asia. Even in Japan, where Apple had 75% of the smartphone market, Samsung made some significant gains at the end of 2010.

The problem with this report it is still essentially rumour. Rumours that have been kicking around since the release of the first iPhone. To make an Apple rumour more believable there needs to be something to make the report credible. Last year the lost iPhone 4 handset was taken apart and it was clearly Apple. There is nothing to back this particular rumour. Here are three reasons why Apple is unlikely to release a Nano Phone:

1. Apple don’t need a lower end iPhone. Given that Apple are making more profit than all the other handset manufacturers put together, dominating the market by volume isn’t really that important. True, Steve Jobs once said that one day all phones would be iPhones, but I think we can put that down to bravado. It is not consistant with Apple’s market strategy to date.

2. A smaller iPhone isn’t cheaper to build. Building a smaller iPhone is technically problematic, and wouldn’t be any cheaper. Reducing some features such as such as a camera or memory may help keep costs down, but not significantly so.

3. A different size screen would create compatibility and usability issues. Apps would have to be redesigned (there’s 250,000 of them in the app store) and the virtual keyboard would be much harder to use.

It is unlikely therefore that Apple will produce a smaller model of iPhone. If Apple are to go the route of an cheaper model of iPhone then the solution may lie in a stripped-down version of the existing phone. Keeping the screen size the same will remove two of the three issues outlined above. They could reduce some of the functions such as the memory, cameras (no forward facing cameras) and a lower resolution screen. Apple will still need to take care to ensure that they don’t take out the ‘iPhone-ness’ of a cheaper device. In the end, the decision will come down to how much of a threat (or perceived threat) there is to their profitability with their existing mobile offering.