Several analyst expect Apple to capitalize on the initial success of the iPhone by offering a more affordable version of the device. But some also think that the company would rather release the much anticipated so-called video iPod, which will have a large screen, but will not be a phone.

Kevin Chang, an analyst from JP Morgan believes that Apple iPod nano will eventually transform into Apple iPhone nano, a more affordable version of the device that was sold in up to 700 thousand quantities in its first weekend. The device will be released in the Q4 2007, reports Reuters news-agency. The analyst cited a patent application of Apple as an evidence of iPhone nano preparations.

Apple filed a patent application document dated July 5 that refers to a multifunctional handheld device with a circular touch pad control, similar to the iPod nano’s scroll wheel. Still, patent application does not necessarily point to a new cell phone, as iPod music players are multi-functional these days due to the fact that they can playback music, video, display photos and even play simplistic games.

“We believe that iPod nano will be converted into a phone because it’s probably the only way for Apple to launch a lower end phone without severely cannibalizing iPod Nano,” Mr. Chang said noting that the new phone could have “rather limited functionality”.

The analyst believes that the less expensive iPhone will cost about $300. Currently Apple offers several version of the iPod nano digital media players at $149, $199 and $249 price-points.

Meanwhile, another analyst Gene Munster of Piper Jaffray said he expects Apple to bring out iPods that resemble iPhone, which features such as a touch-sensitive screen, later this year. Such products would help stop iPhone eating into iPod sales.

“We believe the iPhone reveals much of what the iPod will soon be. iPods with some of the touchscreen features of the iPhone should lessen the impact of cannibalization,” said Mr. Munster in a note to clients.

It is well-known that music-oriented cell phones, such as W-series by Sony Ericcsson, are sold in much larger quantities compared to digital media players, such as Apple iPod. Many analysts believe that sales of Apple iPhone will cause sales of the iPod to slowdown, however, given the quite high price of the iPhone, it is unlikely to happen. A lower-end version, however, can affect both cell phone as well as media player markets.