Could Apple replace iPod touch with a budget iPhone?

VintageZen has a post up asking what place in Apple's lineup the iPod touch would serve once a budget iPhone hits the market, especially if it's ultra-cheap and Apple can strong-arm the carriers into offering pay-as-you-go plans and iPad-like month-to-month data plans. Also, unicorns.

With the coming fall event, this is Apple’s opportunity to make a trademark dramatic move and kill off the iPod Touch from their product line. However, they shouldn’t just leave a void where the iPod Touch once was, they should replace it with the much rumored low-end iPhone. The low-end iPhone would fit perfectly into the market where the iPod Touch was, and in many ways would be better than the iPod Touch for most consumers.

Daring Fireball thinks it could help equalize the iPhone product vs. Android OS numbers metrics companies love to trot out.

It makes sense in a lot of ways for Apple. Simpler product lineup. It would even help with “smartphone market share” numbers — iPod Touches are dark matter in such comparisons that only count “phones”. Plus, I don’t recall seeing (or hearing privately, myself) any rumors about a new iPod Touch for this fall.

TUAW battled this out back in June. The whole debate is worth reading (check this link below) but in sum:

Apple has removed the "iPod" branding from iOS 5. In iOS 4 and earlier, both the iPhone and iPad handle music playback via an "iPod" app, but in iOS 5 these two devices instead have a "Music" app just like the iPod touch. It may mean nothing, but it's still an interesting move considering the iPod was Apple's top-selling product for so many years.

Apple certainly has killed products, even best selling products like iPod mini (which was replaced with iPod nano). Right now iPod touch sits in the middle of the road -- no phone, no 3G, no large screen. If the budget iPhone really is cheap to buy and cheap to run, is there any space left for the current style iPod touch? Or do those two lines become one?

[VintageZen, Daring Fireball,