Bloomberbg yesterday unearthed the aging iPhone nano rumor and gave it a new breathe of life. Quoting unnamed sources in the know, the publication reported that a smaller and cheaper iPhone is in fact in the works.

Speculating Apple might release the smaller iPhone mid-year, authors Peter Burrows and Greg Bensinger wrote:

Apple has considered selling the new iPhone for about $200, without obligating users to sign a two-year service contract, said the person who has seen it.

While smallish, we take it the iPhone nano would retain the 320 by 480 pixel resolution of the iPhone 3GS in order to make it pixel-compatible with the 300,00 third-party applications.

It would also use the same chips found on iPhone 4, sources claim, rather than an improved silicon said to be powering iPhone 5 in order to keep production costs down.

Taking control away from carriers

Users would be able to use the iPhone mini on a pay-as-you-go basis, which is the way to go in Europe, or sign a service contract separately from the device. Users would elegantly avoid early termination fees when canceling the service because the iPhone nano would sell unsubsidized. Universal SIM technology, another first, would free users from the hassles of switching SIM cards when switching their GSM wireless operator.

Carriers are reportedly unhappy with Apple trying to wrestle away from them their control and influence over customers. Users would simply choose a network and configure their device using built-in software. Gigaom reported last October that Apple was working with Gemalto on an open SIM to support these capabilities, sending European carriers in the panic mode. Financial Times reported at the time that wireless operators had threatened to stop offering subsidies for the iPhone should Apple pursue those plans.

Why the iPhone nano matters

The cheaper iPhone without a lengthy cellular contract could become a hit with the youngsters, especially in Europe where people are accustomed to picking a phone separately from their cellular service. We saw this diversification strategy at work with the iPod. At first, Apple sold only a pricey hard-drive based model. As competitors were beginning to catch up, Apple crack opened the market with a cheaper iPod nano that became a smash hit with young target groups. Today’s iPods cover the price range from $49 all the way up to $399.

For a long time analysts have been demanding that Apple widen the price umbrella by diversifying the iPhone. The swelling market share of Android-powered smartphones, the arrival of mid- and low-end Android phones and the just announced Nokia-Microsoft partnership may have accelerated the iPhone nano plans.

Sooner than later, the Cupertino firm will have to address lower segments of the market as the high-end dries up. Currently, the iPhone is a high-end play and as such has seen tremendous successes.

Research firm Asymco estimated that Apple’s handset in the December quarter accounted for more than half the mobile industry’s total profits, or 51 percent, and that’s based on about 22 percent share of revenues.

A less expensive iPhone would significantly broaden the iPhone’s addressable market and make the gizmo more appealing. Currently, the high-end iPhone targets only a quarter of the worldwide mobile phone market. With the $200 iPhone nano, Apple could compete on a much bigger scale, while offsetting lower margins of such a device with high volume of sales.