Cheap iPhone 5 Versus iPod Touch

it has been commented on most of the iPhone forums nowadays that the iPod touch is on its way out, to be replaced by a lower-cost iPhone 5. It sounded ridiculous at first, but the evidence they provide sounds pretty compelling when it’s all put together.

According to iSuppli, “The components that make up the 16 GB iPhone 4 cost just under $188.” That of course should be taken with a grain of salt.
Production of the iPhone 5 allegedly begins in July, with a launch in September — traditionally the time Apple unveils new iPod hardware.
iOS 5 will debut in the fall, and major iOS releases tend to come alongside new iPhone hardware.
Thus far, there is no mention of new iPod touch hardware in the iOS 5 betas.

After running through the numbers a bit more closely, selling the iPhone 5 for $299 looks like a net loss for Apple (which ain’t gonna happen), but selling it at $399 would yield a profit of about 17 percent. That’s far lower than the margins Apple currently enjoys on the iPhone, but Apple’s financial guidance for the past couple quarters has warned investors to expect overall profit margins to decline. There’s certainly room enough for the iPhone’s margins to thin a bit but still make Apple tons of money.

I’m not saying Apple will do any of this, but I will not be at all shocked if it chooses to. The iPod touch has always been a sort of an “also-ran” in the iDevice line, an iPhone-lite for people who don’t want to be tied down to a contract. If the iPhone becomes available contract-free everywhere, and at a price comparable to what the iPod touch sells for today, I still believe the iPod touch would have no reason to exist anymore.

It turned out to be a lively debate, and we’ll see who’s right in a couple months. In the meantime, there are a couple of other things to keep in mind. First, 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.

The other thing to keep in mind is a recent quote from Instapaper developer Marco Arment, who sums up my side of this argument perfectly: “When speculating on what Apple will or won’t do, a change that gets them more iPhone customers is probably worth considering even if you think they’d ‘never’ do it. iPhone customer acquisition is a higher priority than almost everything else.”