|What the iPhone Nano might look like.|
Here's how the plans shape up: The iPhone 5 will have a 4" screen, but keep the overall form factor the same, and the new A5 dual core processor with about 4x the graphics power of the current A4/PowerVR combo. They might bump the RAM up, too, and maybe the storage space, but I'm inclined to doubt that because of what they plan for MobileMe: Making the $99 service free, and encouraging people to store stuff there instead of locally on their phone. (Though given how difficult bandwidth can be to find and maintain, I don't know about this idea.)
The iPhone Nano will be about half the size, with an edge-to-edge screen, and a significantly lower price point. The current iPhone 4 will probably get a lower price point, and maybe push the 3GS off into the old products graveyard. I expect the iPhone Nano will probably have similar specs to the iPhone 4.
The main idea here is that Apple needs to get a sexy lower-cost iPhone out there to counter the hordes of less expensive smartphones on the way (as I discussed earlier, the $99 smartphone sans contract will happen this year sometime; you can already get a $149 model).
What does all this mean? It means Apple is serious about not just maintaining its iPhone sales, but growing them even in the face of enhanced competition. The time is certainly right for Apple to move to the lower end. This mirrors their successful strategy with the iPod, which once was a single model... now it covers a range of form factors and prices and capabilities. Expect the iPhone line to grow the same way, especially when you consider it's about 40% of Apple's total sales. They're not going to stop pushing on that any time soon.
Expect Apple to continue selling a lot of iPhones... I expect they will move close to 100 million this year. Whoosh.
For developers, though, it's yet one more form factor to worry about, and something else to test on. And you'll have to think about continuing to support the A4, as well as the A5 going forward. Here's the opportunity ahead, game developers" Be the first on your block to support the A5 with an awesome A5-only title, and garner enhanced press and some good cross-marketing for other titles.