Starting sometime before the launch of the iPhone 3G in July, the Apple rumor mill keeps churning up guesses about the ‘iPhone nano.’

The rumor consists of a few main points:

Apple will release a phone that is physically smaller. This iPhone will be cheaper because Apple will leave out features found on “regular” iPhones.

Let’s look at these points one by one:

1. A Physically Smaller iPhone: The iPhone now sports a 3.5-inch LCD (measured diagonally). The case is in-line with other smartphones - 4.5 by 2.4 by 0.48 inches. It’s comfortable to hold with one hand and big enough to cradle with your palm and type with your thumb. Anything smaller would be difficult to cradle.

The issue that outweighs the “how does it feel” factor is the on-screen keyboard. With a smaller screen, the keys on the keyboard would have to be smaller. A work-around would be having a horizontal-only keyboard, but that would require the user to flip the phone on its side anytime text input was needed.

A common argument I hear is “If Apple changed sizes, it would break current apps that are built for the iPhone’s 320 x 480 screen.” While this is an issue Apple and the developer community will have to deal with, it is ridiculous to think Apple will always stay with the 320 x 480 format. If Apple changes it, the developer community will adapt. It’s not really an issue in my mind.

2. The iPhone Nano Will Be Cheaper… Like $99: When the iPhone was released, it cost $499 for the 4GB model, and $599 for the 8GB. These days an 8GB model will run you $199, while $299 gets you 16GB of storage. Quite a change, but I don’t think the price is going to sink any lower.

Here are some numbers: in the first quarter of 2009, Apple sold 4,363,000 iPhones.  If the company sold the same number of 8GB and 16GB models, the company made $1,090,750,000 on iPhone hardware sales. That’s a lot of money. I don’t see Apple wanting to cut their margins on what has turned out to be a cash cow. Not to mention Apple doesn’t want to be the bargain bin provider - for computers or iPhones. They like being the premium brand - and they do well at the upper-end of their various markets.

3. The iPhone Nano Will Have Fewer Features: Apple doesn’t like having products that don’t represent the brand fully. An iPhone (at this point) with no 3G or no GPS does not further the brand. It’d be like Apple releasing a new iMac running on G5 processors. Once they went to Intel, they can’t go back. Even the iPod Shuffle - Apple’s cheapest hardware offering besides peripherals - screams Apple. An under-powered, under-featured iPhone couldn’t do that effectively.