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Summary:

As an Android phone user, I keep thinking how great it would be if the next iPod touch is every bit an iPhone minus the cellular voice support That’s not going to happen when Apple next updates the iPod touch, however, for one simple reason: money.

We’re nearing the end of summer here, and that means two things without fail: back-to-school sales and the annual Apple iPod touch refresh. Although I switched to an Android handset in January, I do miss my daily iPhone use. I’m getting my iOS fix through an iPad for now, but I keep thinking how great it would be if the next iPod Touch is every bit an iPhone minus the cellular voice support. That’s not going to happen this September or any September when Apple updates the iPod Touch; the iPhone will always have better specifications than the iPod Touch for one simple reason: money.

Many people will miss the point if they simply compare prices between an iPhone and an iPod touch. The most current iPod touch models cost $199, $299, or $399, depending on the storage capacity. Apple has a history of holding prices at the same levels with new or improved products, so I anticipate the next iPod touch line will follow suit. An iPhone 4 appears to be the same $199 or $299, again depending on capacity. Both the 32 GB unit iPhone and iPhone touch have a price point of $299, so I’ll use them for my explanation. That sounds reasonable, except there’s a problem: Apple earns about $600 for that iPhone 4, because the carrier subsidizes the difference, and there lies the crux of the parity problem between an iPhone and an iPod touch, which doesn’t enjoy any subsidy.

Why would Apple ever add all of the latest and greatest iPhone features to an iPod touch device that will only earn it half as much revenue? The simple answer is: it won’t because it doesn’t make financial sense. Does that mean the next-generation iPod touch won’t see a hardware bump? Nope. I fully expect new iPod Touches to gain at least one camera — possibly two for FaceTime support at some point — a GPS receiver, or some other current iPhone-only feature. Eventually, the iPod touch may get a high resolution Retina Display too. But the iPod touch won’t ever get all iPhone features all at once, because Apple can make the same device with support for voice calls and earn twice as much money.

The only exception to my prediction is when cellular voice networks are supplanted by data networks that truly support voice — perhaps then we’ll see an iPod touch with LTE support. Of course, such a beast will require a contract, at which point, the iPod touch and iPhone converge to one device anyway. And wouldn’t that defeat my whole strategy of having an iPod touch with the iPhone features but without the monthly service fees?

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  1. Good angle. That subsidy becomes apparent if you read the fine print on Apple.com, and see that the “gift price” for a 32GB iPhone is $699 (iPod plus $400).

    There is a great hidden argument here against all phone subsidies – but the phone-buying public doesn’t appear to be interested in ceasing their 24 month amortization schedule.

  2. I don’t want to be too negative, but I can’t see where you’re getting this argument from.

    You are saying that the iPod touch won’t ever be “an iPhone without the cell radio,” but every year so far, that’s exactly what the iPod touch they announce actually is. This year will be the same (as you yourself say in the article). It will have a gyroscope and two cameras and pretty much everything the latest iPhone has except the cell radio.

    The only thing Apple has ever left off the touch is the microphone. If they leave off the front facing camera this time, you might have an argument but as of right now…

    1. I had the exact same reaction – it makes sense on paper, but it’s the opposite of what Apple has done in the past. We’ll see next month.

    2. The iPod touch is far less than an iPhone without a radio. It lacks the camera and the GPS.

      1. The GPS is part of the cell radio. Standalone GPS chips consume tons of power and take a minute to get a reliable fix. Assisted GPS chips (like the ones 3G phones use) talk with cell towers to get a rough position, then use that as a “hint” to the GPS receiver.

        As for the camera, you are correct of course. That and the microphone are the two features of a given year’s iPhone that have always been missing from that year’s iPod Touch.

      2. @Zimmie

        That’s not GPS, that’s a poor substitute.

  3. What about iOS market share? Yes, I know Apple is profit and not market share driven, but only a high market share (i.e. a large user base) will ensure that iOS stays competitive against Android. For now Apple has the huge profits advantage and that’s what attracts developers (more (and better) developers means more (and better) apps, more (and better) apps means more users, don’t forget it’s all in the apps nowadays). Over time, I think, Android will use its fast growing market share to catch up with Apple’s profit advantage.
    Don’t fool yourself, Apple has never forgotten how it lost to Microsoft. Steve Jobs won’t let that happen again. And that’s why Apple needs a hugely popular iPhone sized iOS device without the burden of a 2-year contract. Apple needs the iPod touch to grow market share. I’m just wondering when we’ll see an Android equivalent to the iPod touch?

  4. I would agree with the Author’s logic, although I’m really hoping the next iPod Touch at least has: 2 cameras, A4 processor. A GPS addition would be great, and allow the Touch to become an Auto GPS unit ala Garmin and others, but I think that capability will be what Apple will leave out of the Touch this time. Too Bad. Mainly I’m hoping for the 2 cameras. One for Facetime, and the other for Augmented reality/Photos/movies, but I also assume, they won’t put the 5mp version the new iPhone has, just the 3mp of the 3gs iphone.

  5. I like logical arguments like this and I agree with your facts. But I’m not sure I agree with your conclusion.

    Are the iPod Touch and iPhone really in competition with one another? The defining difference is the phone, not some additional features. I can’t see anyone who wants a phone settling for an iPod Touch. And I can’t see anyone who doesn’t want a phone jumping up the the iPhone for additional hardware or software features.

    1. Thanks for pointing out the (not so) obvious.

      The author’s (Tofel) argument makes no sense. Dumbing down iPod Touch feature set won’t sell more iPhones and will retard the growth of iOS (Face Time, App development, etc.)

      Adding cameras to allow iPod Touch users to use Face Time. It is a great feature for customers and a win for Apple (the more face time capable devices in customers hands, the more valuable / useful face time is)

      Adding retina display will give developers a larger market for their high resolution, retina display optimized apps. Same idea for gyroscope. Having a larger installed base with same features is a big win for developers.

      Apple wins by selling iPod Touches with a great feature set. Better features leads to better Apps leads to more compelling product leads to more sales. They don’t win by dumbing down iPod Touches.

      1. sfmitch, I agree with you that adding such features helps expand iOS in general. But are you suggesting that Apple will accept reduced profit margins for that expansion? I don’t think they will, which of course, is debatable. The company’s history doesn’t support that argument.

    2. Totally understand your view, but I’m one of those that wants an iPod Touch to complement my Android smartphone. However, I keep holding back because the iPhone offers more than the iPod touch, i.e.: true GPS, higher resolution display, two cameras, etc…

  6. Disagree that other-than-phone feature parity between iPod Touch and iPhone couldn’t happen.

    One reason for Apple to do so is to “suck the oxygen” out of the competition and make Android devices look lame once again. Apple doesn’t win customers by being a little ahead of the competition, Apple wins customers by being WAY ahead of the competition, like with FaceTime. One example is that Apple would win big with a iPod Touch 4 by making FaceTime an option for people like grandparents who don’t need such a sophisticate PHONE, but would be delighted to have a simple device for video phone calls. That grows the available pool of FaceTime customers, making the iPhone 4 that much more desirable. (They’ll really win big when they make FaceTime available for Macs.)

  7. This is exactly why I have never bought an iPod Touch. I have no use for a cell phone (apart from living in an area with no cell service), but I have use for a camera and a GPS. And, so I have an iPad. True, it does not have a camera, but it offers so much more than the iPod Touch offers that I can overlook the missing camera.

  8. I believe the iPod Touch will have 2 cameras… 1 camera to make up for last years joke of an iPod Touch release and 1 for Face Time, a feature they’re probably gonna push pretty hard on all their devices… The Retina display and gyrometer are givens because they aren’t gonna have developers add these features to their apps for the heck of it… And if the iPod Touch has a camera (which will most likely be able to record video) it stands to reason it’ll have a microphone… 1Ghz A4 and 512mb is a given as Apple has almost always matched iPhone internals in years past and because you know multitasking requires it…

    The only things this years won’t have is GPS and a 3G radio…

    Apple is working on implementing Face Time into e-mails and the leaked prototypes last year were shown to have a hole on the back of the iPod, so it stands to reason that there will be 2 cameras… Now there is a chance the cameras won’t be as good as the iPhone 4’s cameras, but a cams a cam…

  9. That subsidy is precisely why Apple ought to bring out an iPod touch with near-feature parity with the iPhone. The current scheme is simply not a cost effective way for Apple to make its profits.

    Do the numbers. The real cost of an iPhone isn’t simply the purchase cost plus Apple’s profit from the subsidy. It includes all the additional costs that iPhone users must pay that iPod touch users don’t pay.

    AT&T’s large infrastructure for voice and data service. Not needed when you’re using the WiFi at your local coffee shop.
    AT&T’s monthly charge for voice and data services. Not needed if you’re happy with a budget plan from another provider.
    AT&T’s profits. Why should Apple have a business model that regards AT&T’s profits as sacred?

    Each of those items is a cost imposed on iPhone users for which Apple gets not a penny. To get its $600 subsidy, Apple must impose about $2,000 in additional costs on its customers. Many people aren’t buying what Apple is selling because they refuse to pay $2,000 for roughly $100 in added hardware (GPS+gyroscope+mike+a merely tolerable camera). They’d happily pay more for a feature-rich iPod touch, but they won’t pay the vastly higher costs that an iPhone imposes.

    And that’s a lot of lost business and missed profits.

  10. This is of course where commentary by John Gruber breaks down. We will never see an iPhone competitor for the same price, because the carriers weren’t convinced to abandon typical pricing models. This also supports the profitability that Apple enjoys.

    The question is whether Apple can continue to enjoy this structure. I say not past next year. Android will be sufficiently advanced over this term should Google choose to make many aspects a priority. Gaming is just completely absent as are most media development structures. I put my money where my mouth is…

    We will however see more advanced models of iPods, and the iPad is exactly the model. I just picked up a Dell Streak and expect Apple to have an equivalent model. I will purchase that as well. Long haul however, I am all Android, having jumped into the mobile pool with Apple and bitten by the iTMS lock in.

    The problem with so many of these scenarios, is how many media players would jump ship with a viable model.

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