Is the iPod Touch a Bigger Game Changer Than the iPhone?

08touch_gamesThe iPod Touch might be hiding in the shadow of its big brother, the iPhone — both in volume, and revenue — but is it possible that the Touch is more disruptive than its cellular sibling? The iPod Touch has seen huge growth within Apple’s (s aapl) iPod category, with Touch sales growing more than 130 percent year over year, while total iPod shipments dropped 4 percent. Apple noted in its quarterly earnings call last month that while it expects total iPod purchases to continue to decline, it is cannibalizing its own sales with the Touch and iPhone. I suspect the Touch’s growth will accelerate as customers transition from simple music players to more multifunction pocket devices — and that switchover has the potential to seriously shake up the world of mobile gadgets.

The iPod Touch is a lightweight, highly portable music and video player, communications and gaming platform and, if rumors are to be believed, its next generation will include a digital camera for stills and video — and maybe even VoIP, all over its Wi-Fi connection. That’s a lot of power from a $229 device. It’s that easy access to the Internet through a Wi-Fi connection that makes the device so interesting. Almost two years ago, long before the iPhone 3G and the App Store made its debut, Apple executives were touting the iPod Touch as the first “mainstream, mobile Wi-Fi platform.” Now, with the 65,000-plus third-party applications on the App Store, the Touch platform has grown significantly since Apple first lauded it in 2008.

The iPhone, of course, is also part of this platform, which is why Apple frequently combines the sales numbers of the two products. At last count, there were 45 million devices capable of running this “Wi-Fi platform” worldwide — also known as the sum of iPod Touch and iPhone sales. By comparison, Sony (s sne) has sold 58 million PSPs, and Nintendo has sold 108 million of its DS handheld gaming device since 2004 — both gadgets have Wi-Fi, but not nearly the interactivity and multi-functionality that the Touch has. It’s curious that the iPhone gets so much of the coverage, while the iPod Touch gets second shrift. The iPhone can make calls, but with free Wi-Fi networks popping up everywhere thanks to deals with ISPs — plus campus-wide Wi-Fi networks at most colleges across the U.S. — the iPod Touch is fast becoming the WiFi-enabled mobile device to beat. Even Rockstar is releasing an iPod Touch edition of its venerable Grand Theft Auto franchise.

Apple is perpetuating a “virtuous cycle,” as Gene Munster put it in a recent research note, to keep users on the iPod Touch — an improved version of the lock-in provided by the old iTunes/iPod music ecosystem. Users buy the iPod Touch; download apps; developers promote their apps (and the iPod Touch platform), which leads to more consumers buying the iPod Touch. Even better (for Apple), customers can only purchase apps through the company, leading to even more device lock-in.

iPod sales might be dropping, but Apple says half of new purchases of the device are to customers who have never owned one before. I’m willing to bet that many of those customers are interested in Apple’s new Wi-Fi platform. And then, in an even more impressive version of the iPod halo, iPod Touch owners could look to Apple when it’s time to buy their next computer. A virtuous cycle indeed.