When I read this kind of article I can't think that the current cost of an iPhone is less that $180[1] and it's sold at around $600-$700 without contract around the world...
So how much has to cost a smaller iPhone to Apple to sell it at this price?
While I'm not saying 600-700 is fair price, I'm sure a lot of money went into R&D. I wouldn't doubt that R&D accounts for a significant portion of the difference in price. It would be interesting to know how much profit they are making on each device.
Apple charges the high price without contract now because it is under the contract model still. EG: It sells to AT&T et all for $600 in the contract model and is subsidized. AT&T would not be happy if Apple sold that same phone without a contract for $300 or $400.
The nano idea is for a phone that does not sell subsidized, and is differentiated from the subsidized ones by not being the current generation. For instance, it might not have a retina display.
If Apple can make it for $99, they will be happy to sell it for $199. I think this is quite possible using year old chipsets and components. I can see Apple also making it for $140 and selling it for $199. Both provide sufficient margins. Apple also invested $4B in strategic deals to secure the supply of components last fall, which may allow them to get these components cheaper than everyone else.
I don't think margin is the problem, I think getting the networks to go along with the plan is the hard part.
This strategy seems a no-brainer to me, as Apple will soak up wide swaths of the market with a "feature iphone".
The other challenge, though, is getting manufacturing capacity to produce it. I think this means that this iphone will not be as stylish in order to make it easier to manufacture for less sophisticated contract manufacturers, and this subdued style will also help it differentiate from the contract phones.
Apple didn't want to sell subsidized phones in the beginning- they wanted to sell the phones and have the carriers provide lower cost service plans (because they didn't need to recoup the subsidy.) This plan didn't work and so apple relented.
We may be seeing Apple's second attempt at reforming the mobile industry... this time from a position with more power.