iPod Touch's Holiday Sales Spike Likely Beat the iPhone's

Ever since Apple (AAPL) introduced the iPhone in the summer of 2007, it has been hailed as one of the most revolutionary products in tech history. By comparison, the iPod touch, which has all the iPhone's features without the cell phone, has been downright publicity-starved.

But this holiday season, it seems the thinner, cheaper device may be Apple's breakout hit. While actual sales data are not yet available, Broadpoint AmTech (BPSG) analyst Brian Marshall figures iPod touch sales soared more than 100%, to 7.2 million, in the final quarter of 2009, while iPhone sales rose 53%, to 11.3 million.

For further evidence of an iPod touch boom, check out the data from Flurry, which makes analytics software embedded into thousands of mobile applications. While the number of apps downloaded onto iPhones rose 29% from Dec. 24 to Dec. 25, downloads onto iPod touches skyrocketed by more than 300%—and surpassed the iPhone for at least that day. "It wasn't just that the iPod touch barely squeaked by," says Flurry Vice-President Peter Farago. "It blew the doors off the iPhone—and overnight."

The iPod touch can do pretty much anything an iPhone can do, and for a lot less money. It features the same slick multi-touch interface and can run almost all the 100,000-plus programs in Apple's App store. The main difference is that the iPod touch does not work over cellular networks, so owners must be within striking distance of a Wi-Fi hotspot to go online or download apps. But Wi-Fi is available in most homes, offices, airports, and coffee joints, either for free or for a few bucks—but it costs nowhere near the monthly $100 of an AT&T (T) contract.

To some extent, a spike in iPod touch sales has become an annual yuletide ritual. Given its price—ranging from $180 to $399, depending on memory—and ability to run apps, the device has taken the portable gaming market by storm. Carol Cirulli Lanham, a mother of two from Dallas, says she bought an iPod touch for her 12-year-old son "because I would not want to pay for the monthly contract fee. Plus, I think an iPhone at this age would really make him a spoiled brat."

This year, iPod touch sales may be getting an extra boost from the travails of AT&T, the exclusive carrier of the iPhone in the U.S. Because of Ma Bell's network problems, including frequent dropped calls and spotty Net access in cities such as New York and San Francisco, many consumers are opting to carry a new iPod touch along with their old cell phone rather than rely on an iPhone. "I just couldn't put my trust in AT&T," says Scott Gingold, the owner of a market research firm based in New York City. Instead, Gingold carries a BlackBerry that he uses for email and making calls, while he relies on the iPod touch for running apps and going online.

Folks like Gingold may also be tempted by Apple's much-rumored tablet device. The company would not comment for this story or confirm talk that the gadget will be unveiled at a Jan. 26 event. But sources expect the tablet device to be roughly three times the size of an iPhone, making it well-suited for playing games, running apps, and reading e-books or online newspapers. The device may also rely on Wi-Fi, allowing Apple to further distance itself from AT&T's service woes.

Still, the question remains as to whether the iPod touch can stave off a long-term decline in iPod sales. Even raging bulls such as Broadpoint's Marshall, who on Dec. 28 raised his target price for Apple stock to a stratospheric 260 from its current all-time high of 209, expects overall sales of iPods to tail off in the years ahead, as their features are incorporated into smart phones.

But the worst-case scenario for Apple doesn't look so bad. Usually, maturing products suffer not only from falling unit sales but falling prices. That's not the case with iPods. The iPod touch is the best-selling MP3 player on Amazon.com (AMZN), beating out the $59 iPod shuffle. And while it remains to be seen how long the holiday boom in iPod touch sales will last, Flurry's Farago believes it won't be just a one-quarter blip. "What we know for sure is that a huge new batch of iPod touch users was injected into the system."

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