"We believe that iPod Nano will be converted into a phone because it's probably the only way for Apple to launch a lower end phone without severely cannibalizing iPod Nano," Chang is quoted as predicting. If the rumor is true, then it indicates that Apple is looking to break into the lower end in order to gain market share. Apple has always targeted the margin-rich higher-end of the spectrum.
While the company's iPhone enjoyed an excellent launch and a massive amount of publicity, its sales will be limited to a small percentage of the market due to its high price tag. In the United States, consumers tend to spend around $100 on a phone. Apple's iPhone comes in two models, a 4GB model for $499 and an 8GB model for $599.
Source:
Ars Technica