I’ve been thinking about this “iPhone nano” rumor that’s been resurrected by the Wall Street Journal this week. On one hand, the WSJ has had an impeccable record of getting Apple rumors right recently. So it’s hard to discount the rumor as nonsense. On the other hand, this rumor has been around since the day after the original iPhone was announced, and it hasn’t come to pass yet. Plus, lots of smart Apple bloggers like John Gruber are rightly questioning the idea of an iPhone that’s actually smaller than the current iPhone. Make the screen smaller, and the app experience will surely suck. Don’t make the screen smaller, and there’s no way to make the phone much smaller than it already is. So what would be the point?

I think the problem here is that people are focusing on the ‘nano’ part of the rumor. The smallness. The idea of branching the iPhone into a family of products is, in itself, obvious and easy to understand. There’s more than one Mac. There are a variety of iPods. Why wouldn’t Apple do this with the phone? But smaller?

What if smaller weren’t the point? What if smaller were a side effect, not the reason behind the change?

Clearly, there’s no one phone that will please everyone on the planet. Sooner or later, if Apple wants to keep grabbing more people and keeping its competitors from catching up, it needs to market a different phone to a different kind of customer.

But once you accept that a family of iPhones is possible and probably eventually likely, you then need to ask, what would the differentiating factors be on different iPhones? Macs are split between desktop and mobile, pro and consumer. iPods are split according to different storage capacity needs, extreme portability for activities like running, and price.

When the iPod nano was introduced, Apple was making a grab for the flash storage market for portable music players. Yes, the nano was capable of being smaller, because it didn’t require a hard drive, but that was a convenient marketing point to focus on. The real thing that made the nano a success was the lack of a spinning hard drive. Suddenly, working out with an iPod became truly practical, because you eliminated skipping. So an entire group of people who were not interested in hard drive iPods (including the mini, which was already very small) suddenly started buying iPods. All the other flash-based players soon died a painful death.

When the iPod shuffle was introduced, it offered a limited iPod experience (no screen, but still synched with your iTunes library) for a very reduced cost. The only market for music players left that Apple hadn’t addressed had been addressed. Game over.

So then what about the iPhone? Who are the non-iPhone people? Are people not interested in the iPhone because it’s too big? What is it that stops those who don’t already have an iPhone (which is most people, by the way) from getting one? If you can answer that question, you can make some guesses about what an iPhone sibling might look like.

I put the the current crop of non-iPhone owners into three basic categories:

• The iPhone isn’t available where I live or on my carrier of choice
• I don’t need a “smart” phone; I just want to make calls
• I don’t want to or can’t spend the money on an iPhone.

Apple has been working on the first category for the last four years. This group of people doesn’t require a different model of iPhone. They would be fine with the standard iPhone if it were available to them. By offering the iPhone in more countries and on more carriers, Apple has shrunk this category significantly. The Verizon deal earlier this year was significant not just because it essentially solved this issue in the US, Apple’s home market, but because it ended the notion of carrier exclusivity for the iPhone in general. Apple is now saying that any carrier that wants to do a deal and make the iPhone available is welcome to it. So this group will go away entirely as more countries and more carriers continue to come on board.

In the second and third categories, there is significant overlap. Many in the second category are using “I don’t need it” as an excuse to mask the truer “I can’t afford it” or “I’m too cheap to pay for it.” There are some, however, who I believe really do just want to make phone calls and a few other things. And some who are paranoid about being “connected” to the ‘net 24-hours a day. And some still who are technology-phobic in general. Many of these folks reluctantly get a cell phone “for emergencies only,” and thus would be silly to spend the money on an iPhone, no matter how cool it is.

For these folks, and the poorer folks, and the cheap bastards, there is little more Apple can do now to encourage the standard iPhone ownership. Many tech bloggers think this problem will solve itself eventually, as the world simply shifts over to smart phone use, but I think it’s more complicated than that. It will still be years, I think, before ‘dumb’ phones are no longer needed at all. Years, maybe, before they are even the less popular choice.

Like with the joggers and the iPod nano, this group of people needs a different model of phone altogether. And Apple thus far hasn’t built one for them.

So what does this model look like? The Wall Street Journal, following the rumor as it has always existed, suggests that the iPhone sibling (whatever the name may be, I assume that Apple will not necessarily call this one a nano) would be half the size of the current iPhone, and that it would be $200 and not require a 2-year contract like most phones. Would that address the core issue, though? A small iPhone with no contract? Seems to lack imagination a bit.

The biggest cost of owning a smartphone isn’t the initial upfront cost. And contracts don’t really bother most people, or else there would be more no-contract phones available. The real killer cost of iPhone ownership, of course, is the monthly data cost.

That extra $20 or $30 monthly charge, plus the requirement in many cases to tack on more minutes or text messages, is what is holding the vast majority of customers back from getting a smart phone.

So how does Apple change this? Well, they’re unlikely to get the carriers to start charging less for data. If anything, data keeps getting more expensive, with the carriers switching over to ‘tiered’ pricing models structured to look less expensive, but ultimately costing more for most users in the long run.

So how about this? Maybe the data is the “no contract” part of the rumor. Like the iPad 3G, you can pay for data only during the months you actually use it. Apple would have to convince the carriers to offer such a data plan, but AT&T, at least, has demonstrated interest in such a plan already on the iPad. This still wouldn’t require a different iPhone model, however. And it would only address the cost issue, and not entirely at that. You’d still have to pay quite a bit to get the most out of your device. Most people would still end up paying most months.

How about something more drastic? How about a phone that doesn’t get cellular data at all? Give the phone voice capability and WiFi, but when you’re not in WiFi range, you get no data. Sort of an iPod Touch that can make calls. Could be interesting, but now you have a crippled device; a device that feels like it should do more, rather than a device that is simpler on purpose.

Such a phone would still be more powerful and complicated than some would want, too.

So how about taking away the App Store? Sounds crazy, I know, but killing the iPod mini seemed pretty crazy, too. Stay with me.

What if Apple made a ‘dumb’ phone?

A phone with no App Store would not necessarily be a phone with no apps, mind you. Apple could design its own special apps just for it. All it would need is the phone app, an iPod app, an SMS app, maybe an alarm clock. And that’s it. Like the current iPod nano, the UI could look and behave somewhat like iOS, but it wouldn’t be iOS. At least not on the UI layer. It could offer some customizability, a great user experience designed specifically for it, but none of the advanced functionality of most smart phones. No email, even.

Now, suddenly, an Apple phone with a smaller screen and form factor starts to make more sense. This phone wouldn’t need to be smaller, but it certainly could be smaller. If you take away the iOS user interface and the third-party apps, you can change the form factor without killing the experience. You’d still have a touch interface, of course, but a more simplified one. And you could charge far less for such a device upfront, and charge less per month as well.

A small, sleek little dumb phone that would be the envy of most cell phone users, if not iPhone owners.

This phone would have no appeal for me or any current iPhone owners. But Apple already has us, anyway. It would have no appeal for Android or RIM users, but future “smart” iPhones will take care of that in time. This phone is all about everyone else.

Rather than waiting for the iPhone to switch everyone over to a smart phone mindset, Apple could make the world’s best dumb phone. While its competitors scramble to match the iPhone feature for feature, Apple could make a phone with fewer features and kill what’s left of Motorola’s, HTC’s, LG’s, Nokia’s, remaining business. Game over again. And all of those new dumb phone customers might just eventually become smart phone customers. Why not get them attached to the brand in the meantime?

In the midst of all the rush to copy the iPhone, all of the other phone makers have stopped innovating the dumb phone. This is an opportunity that has Apple written all over it.