Honey, I Shrunk The Ipod. A Lot.

Ever since it was clear that Apple's 2001 foray into digital music would be a smashing success, naysayers have been proclaiming that it was only a matter of time before competitors would catch up to and eventually surpass the wildly popular iPod player. Even though this prediction has so far proved no more reliable than an Enron balance sheet--as of this summer, the iPod was claiming a 74 percent market share of digital music players--Apple CEO Steve Jobs feels the pressure. "Playing it safe is the most dangerous thing we can do," he recalls telling a gathering of Apple's hundred brightest execs and engineers last year. "We have to get bolder."

So Jobs and his team undertook a big initiative to come up with a new iPod model that wouldn't just improve its predecessors but "change the rules." Their efforts bore small results. Very small. The iPod nano--a term meaning one billionth--is smaller than a business card and about as thick as layer-cake frosting. Introduced at a much-touted Apple launch event last week, it blends the weightlessness of the no-screen, low-capacity iPod Shuffle with all the features of top-of-the-line iPods, like navigational click-wheel, color screen and playlists on the go. Most of all, it has that classic Apple combination of Zen-garden austerity and cutting-edge tech swagger that stirs the soul and opens the wallets of cool-seekers and gadget freaks. "As soon as I saw it, I felt like reaching for my credit card," says tech analyst Tim Bajarin.

So confident is Jobs that others will share the same impulse that he's pulling the plug on the world's most popular digital music player, the colorful iPod mini. "We call this a heart transplant," says Jobs. "Stop one assembly line, start another."

What made the nano possible, says Jobs, is "great engineering" that required designing a wafer-thin click-wheel, compressing the electronics and using chip-based "flash" memory instead of the hard disk drive that stores tunes on the mini and the regular iPod. Apple has set the price at $249 for a model that plays 1,000 songs; "from the mini, we learned that number is the sweet spot," says Apple VP Phil Schiller. For those whose sweet spot is a mere 500 tunes, there's a $199 version with half the storage. It comes in white or jet black and, like the latest generation of iPods, can store digital pictures, as well as music and Podcasts.

The nano stole the thunder from the other product launched at Apple's event: a long-awaited iTunes-equipped mobile phone. Dubbed ROKR, it is built by Motorola and distributed by Cingular for $250, with a sign-up for two years of cellular service. Essentially, the ROKR allows you to use the phone as an iPod, albeit one that holds only 100 songs. But because of the arcane economics of phone carriers and the paranoid rules of the recording industry, the Motorola ROKR doesn't even try to make innovative use of the fact that a music player can connect to the outside world. You load up your songs only by connecting to your own computer. You can't use the phone to call the iTunes store and buy the latest Madonna single, and there's no way to convert the music on your phone into a ringtone. You certainly can't call a friend and play a song for him or her. The ROKR does, however, thoughtfully pause the music when you get a call, resuming the song when you hang up.

Jobs says the ROKR will be "the most successful music phone out there by far," but is careful to call it "a Motorola phone with iTunes" and not the progeny of his own team.

So what, he is asked, would an Apple phone look like, and what would it do? "Who knows?" Jobs says, smiling enigmatically. "I can't talk about that." Here's a hunch: the iPhone, if it does come, will be smaller.