I don't see a problem if the iphone nano is a smaller clone of the iphone, what would you rather it be? Smaller formfactor which still should be useable based on how the iphone works with (hopefully) a smaller pricetag to go along with it.
If the price is the same as an 8gb 3g iphone ($199) then no this is a horrible idea, but $99 for a 4gb iPhone Nano would fit in better for those looking for something cheaper than the full-fledged iPhone 3g 8gb and 16gb
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