The iPhone nano hoax

The other day I couldn't help but notice Reuters reporting that JP Morgan’s Kevin Chang was predicting the imminent of an "iPhone nano."  Come on, seriously, how was that going to work?

Here's the quote that struck me as peculiar:

"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," he said noting that the new phone could have "rather limited functionality."

Seriously, how was Apple going to pull off that trick?  Anyone who has taken a look at any of the iPhone autopsy galleries on the web (there's one here for you if you want to take a look inside the iPhone) will see the space problems that Apple are up against.  There's hardly space inside the iPhone for more than a few air molecules.  The idea of taking the iPhone and compressing that into a form factor similar to that of the iPod nano is just crazy (unless Apple has come up with TARDIS technology).  Yeah, sure, it would be cool, but if Apple had the capability of making the iPhone smaller and simpler (and therefore, cheaper to make), it would have done thins already and maybe packed a bigger battery or more memory into the current iPhone.

Sure, a nano-sized iPhone would be cool, and we might see one eventually, but it's not going to happen just yet.

Thoughts?