Apple iPod Touch will cannibalize iPhone

Updated: Apple rolled out its much-anticipated iPod lineup Wednesday and an updated iTunes. A big part of that lineup is the iPod Touch, which is a nice end run around the iPhone due to its built-in Wi-Fi.

What's the biggest hangup with the iPhone? The AT&T network that comes with it (see Jason O'Grady's diary). The fix: Give customers everything but the phone part. Now watch the iPod Touch outsell the iPhone. Another notable thread: This iPod launch is the first installment of Apple's touch screen halo effect.

First here are the nuggets you need to know via Engadget, Apple and Jason O'Grady :

• An iPhone-ish iPod arrives: This iPod is dubbed the iPod Touch. It has the same UI as the iPhone without the phone. Screen is 3.5 inches. The Touch also has built in Wi-Fi. It also has Safari, YouTube and Google search. The 8GB goes for $299 and the 16GB costs $399. Apple statement on the Touch.
• The 8GB iPhone is now $399, down from $599. Matthew Miller and Jason O'Grady lament the early adopter tax.
• A Wi-Fi iTunes store available on the iPod and iPhone. Apple also partnered with Starbucks to identify and buy songs playing over your coffee. Apple statement on Wi-Fi iTunes and Starbucks.
• The iPod Nano gets video: The Nano gets a significant overhaul with full metal design, 2 inch screen for video, games and a new UI. Battery life clocks in at 24 hours audio and 5 hours video playback. Statement on Nano.
• The original iPod becomes the iPod Classic: A new version starts at 80GB with a battery life of 30 hours and 6 with video. There's also a version with 160GB's just in case you wanted to carry around 40,000 songs. The 160GB version will run you $349. Statement on the Classic.
• Ringtones: iTunes will deliver ringtones via iTunes with a twist. You can buy a song and turn it into a ring tone. It's 99 cents in addition to the song price. These ring tones work with the iPhone.
• The Shuffle gets some new colors: There's a red shuffle and a green one too. Same deal as the old ones: 1GB for $79.

With the basics out of the way let's get to the good stuff. Apple's iPod Touch will cannibalize the iPhone. My hunch is that most folks that bought the iPhone keep the phone part as an afterthought. Take a Wi-Fi enabled iPod, toss in a browser and the differences between the iPod and iPhone stop at the phone.

What's really notable about the iPod Touch is that it totally reverses conventional thinking. When the iPhone launched the idea was that the iPhone would cannibalize iPod sales. As this plays out it's going to be quite the opposite.

Update: Analysts notes are trickling in. Here are a few notable thoughts:

TBR:

TBR believes the new iPod touch is the first instance an important new product category, the mobile content platform. With aggressive iPod touch pricing and a radical price reduction of the iPhone, Apple is lowering the entry barrier for this new type of device. At the same time, the new line of iPods will rejuvenate the iPod line which had seen revenue growth flatten in recent quarters. And direct access to iTunes will strengthen Apple’s position in the content distribution market.

And.

Apple announced a partnership with Starbucks, through which users can used the Starbucks Wi-Fi hotspots for free access to the iTunes store. Starbucks’ Wi-Fi network is provided by T-Mobile and normally requires paid user subscription. TBR believes that, in addition to boosting Starbuck’s coffee sales, the iPod Touch will greatly increase the market for Wi-Fi hotspots and should provide a boost to T-Mobile’s hotspot business.

Bank of America:

To us, the most significant product announcements concerned the iPhone - 8GB now $399 vs. prior $599 and 4GB discontinued (likely less than 25% of mix). We believe the 8GB price reduction signals (1) unit sales are not living up to heightened original expectations and the ASP is now more in-line with other smart phones (2) possible positioning of its portfolio for a C4Q07 global (i.e. including the U.S.) launch of a 3G iPhone (vs. 2.5G now). Net, a lower than expected blended ASP likely in F2008 and F2009.

JP Morgan:

Overall, the event was largely in line with expectations with the exception of the price cut on the iPhone. This, coupled with the lower prices and higher capacities across the iPod line, suggests that gross margins could come under near-term pressure.