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I could see them releasing a phone version of the iPod Nano (iPhone Nano?).
Alongside the current iPhone line, not replacing it.
The same thing happens with cars, over time a model gradually becomes bigger and bigger each year, until what was the smallest model in a companies line is now quite big, so they introduce a new smaller model beneath it.
The iPhone has now gotten big enough that there might be room for a smaller model beneath it.
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