Bloomberg this week unearthed the aging iPhone nano rumor and gave it a new breath of life. Quoting unnamed sources in the know, the publication reported that a smaller and cheaper iPhone is in fact in the works.

Speculating that Apple (Nasdaq: AAPL) might release the smaller iPhone midyear, authors Peter Burrows and Greg Bensinger wrote: "Apple has considered selling the new iPhone for about $200, without obligating users to sign a two-year service contract, said the person who has seen it."

Although it would be smallish, we take it the iPhone nano would retain the 320-by-480 pixel resolution of the iPhone 3GS to make it pixel-compatible with third-party applications.

It would also use the same chips found on the iPhone 4, sources claim -- rather than an improved chip said to be powering iPhone 5 -- in an attempt to keep production costs down.

Taking control away from carriers
Users would be able to use the mini-iPhone on a pay-as-you-go basis, which is the way to go in Europe, or sign a service contract separately from the device. Users would avoid early-termination fees when canceling the service because the iPhone nano would sell unsubsidized. Universal SIM technology, another first, would free users from the hassles of switching SIM cards when switching their GSM wireless operator.

Carriers are reportedly unhappy with Apple's attempts to wrestle away from them their control and influence customers. Users would simply choose a network and configure their device using built-in software. Gigaom reported last October that Apple was working with Gemalto on an open SIM to support these capabilities, sending European carriers into panic mode. Financial Times previously reported that wireless operators had threatened to stop offering subsidies for the iPhone should Apple pursue those plans.

Why the iPhone nano matters
The cheaper iPhone without a lengthy cellular contract could become a hit with the youngsters, especially in Europe, where people are accustomed to picking a phone separately from their cellular service. We saw this diversification strategy at work with the iPod. At first, Apple sold only a pricey hard-drive-based model. As competitors were beginning to catch up, Apple cracked open the market with a cheaper iPod nano that became a smash hit with young target groups. Today's iPods cover the price range from $49 all the way up to $399.

For a long time, analysts have been demanding that Apple widen the price umbrella by diversifying the iPhone. The swelling market share of Android-powered smartphones, the arrival of mid- and low-end Android phones, and the just announced Nokia-Microsoft partnership may have accelerated the iPhone nano plans.

Sooner than later, the Cupertino company will have to address lower segments of the market as the high end dries up. Currently, the iPhone is a high-end play and as such has seen tremendous successes.

Research firm Asymco estimated that Apple's handset in the December quarter accounted for more than half of the mobile industry's total profits, or 51%, and that's based on about a 22% share of revenues.

A less expensive iPhone would significantly broaden the iPhone's addressable market and make the gizmo more appealing. Currently, the high-end iPhone targets only a quarter of the worldwide mobile phone market. With the $200 iPhone nano, Apple could compete on a much bigger scale, while offsetting lower margins of such a device with a high volume of sales.

More from Bright Side of News*:

Want to read more about Apple? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

The Motley Fool has written puts on Apple, which is also a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft, which is also a Motley Fool Inside Value recommendation. The Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.