It’s interesting to think about a Nano-sized iPod running iOS. In theory that’d be useful. But if it didn’t have cellular networking, it could only stream when you were on Wi-Fi. So people would just keep using what they’re using today for audio — their phones. Even though the phone is a worse form factor purely as an audio player because it’s so big, comparatively, it’s better overall because it has a network connection almost everywhere.
-John Gruber, “Apple Kills Off iPod Nano and iPod Shuffle”, Daring Fireball