the ipod touch and the iphone: does one product cannibalize another?

Apple’s vast arsenal of products helped it beat analyst estimates for the first-quarter but the recession appears to be having some effect on the company’s performance.

Consumers are choosing some lower-cost options such as the iPod Touch over the iPhone, presumably to save money in a recessionary environment. For evidence, look at the sequential decline in iPhone sales. Now that the initial iPhone 3G promotions are over, wanna be iPhone owners are staring down the barrel of an expensive three-year contract and they don’t like it.

This will naturally lead many to the iPod Touch as an alternative to the iPhone.

The iPod Touch, of course, is the lower-cost, less connected version of the iPhone, which has grown by leaps and bounds since it was conceived by Apple in July 2007.

In a down economy the iPod Touch, which allows users to access the Web via short-range Wi-Fi networks, it seems has become an iPhone substitute for cash-strapped consumers. It’s a phenomenon in the business world known as “cannibalization.”

This is significant as Apple needs to sell a larger and more varied group of products to consumers and businesses in order to sustain its current growth trajectory.

The real issue for Apple, as noted by the company on yesterday’s call, is the substantial cost of data pricing plans by carriers such as AT&T in the United States.

The ongoing global recession (my term for the current economic situation though it hasn’t been declared as such formally) is causing consumers to think twice when deciding whether or not to splurge on an expensive gadget and an accompanying service plan.

This is a troubling trend for the company, whose bottom-line prospects are built on the sale of high-margin devices. The iPod Touch (presumably) doesn’t deliver the same kind of margin an iPhone does for the company. One can only assume the trend will continue for the length of the slowdown/recession.

Over the long term, however, iPod Touch sales will drive iPhone sales. Buoyed by the experience, consumers will eventually upgrade to an iPhone. Or multiple products will be bought for the same household.

Apple detractors point to lower iPhone sales as a sign the company’s iPod Touch and iPhone product lines now overlap, leaving one category to lose in an internal race. It says here the least of Apple’s problems are overlapping product lines; Apple’s handheld products are meant for specific audiences and are therefore complementary. The iPod Touch, in fact, will serve to augment iPhone sales over the long term as it will drive interest in the smartphone, which is a richer mobile experience than the iPod Touch. This upgrade path will, in fact, drive device sales.

There’s anecdotal proof at least that some smartphone users will happily use an iPod Touch on top of their telephony-enable device. That’s because they can’t or don’t want to sideload games or music onto what may be a device used for business purposes. Come time to buy a new smartphone, the iPhone will be considered for that user type.

I am no Apple bull. This growth story will be difficult to sustain for a number of reasons, most notably economic conditions and the mysterious ongoing health conditions of its esteemed leader.

The Apple growth story can be doubted for myriad reasons. But releasing newer and arguably better products to market can’t be counted among them.

[tags] Steve Jobs, Apple, iPhone, iPod [/tags]