iPhone Nano, Touch Debut in Bernstein Analyst Rumornote

Would an iPhone that doesn’t require a data plan spike Apple’s addressable market in the mobile devices space? In a research note to clients today, Bernstein analyst Toni Sacconaghi makes the case that it would.

Arguing that the market for standalone portable media players is certain to decline as consumers upgrade to multimedia smartphones, Sacconaghi says it would behoove Apple (AAPL) to migrate its vast iPod user base to the iPhone. But to do this successfully Apple needs a mainstream device–one free of the required $70+ a month voice-and-data service plan, which for some, is prohibitively expensive.

“Apple’s iPhone has so far addressed the data-centric smartphone market only–in fact, in most countries where it is sold, a data service plan is a pre-requisite for buyers,” Sacconaghi writes. “The other 83% of mobile handsets are largely sold without data service, except possibly text messaging. To more effectively address this part of the market, we believe Apple should offer an iPhone that does not require the user to sign up for a data plan.”

Sacconaghi estimates that adding such a device to the iPhone lineup could potentially add $7 billion in revenues and $4 billion in gross profits annually (assuming a three percent market share).

So what would a lower-tier iPhone look like? Sacconaghi envisions two versions–the iPhone Nano and the iPhone Touch. The former would be a physically smaller device without the larger multitouch screen of its predecessor. It would not support Web browsing or run third-party applications. Think of it as an iPod Nano with an onboard cellular radio for phone calls.

The latter, the iPhone Touch, would essentially be an iPod touch capable of making phone calls. It would not require a wireless data service plan and would access the Internet via WiFi, just as the iPod touch does. While that might sound a bit too much like the current iPhone to be plausible, Sacconaghi notes that the 3G iPhone Apple will presumably introduce later this year could provide enough feature differentiation (read: multitasking, video conferencing, etc.) for the market to support it.

“For the more than 100 million iPod users worldwide, we believe Apple has a significant incumbent advantage in migrating these users to the company’s mobile device platform,” Sacconaghi concludes. “Everyone of these users uses Apple’s iTunes software to manage music, and at least half also use the iTunes Store as a source of content. We believe iTunes usage leads to a ‘lock-in’ effect that discourages iPod users from switching to another platform. In part, the lock-in effect is only perceived–many users appear to be unaware that the majority of their iTunes music collection is likely compatible with other devices. However, there is also a real basis for the lock-in, since switching to another platform necessarily requires the user to learn how to operate new hardware and software. Ultimately, we believe that if Apple does not proactively migrate iPod users to the iPhone, many of them could find themselves forced to adopt another converged device platform despite the iTunes ‘lock-in’ effect.”