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Monday, December 10, 2007, 02:55 pm PT (05:55 pm ET)

iPhone on right track, but won't knock iPod sales yet — report

In spite of its convergence appeal, the iPhone won't yet carve into the iPod's success — but it checks off many of the boxes needed for a future windfall, according to an investor note from analyst firm Piper Jaffray.

The group warns in a new industry overview that as long as a significant price gap exists between dedicated media players like the iPod and multi-function devices like the iPhone, the former will continue to enjoy strong success as buyers choose the less expensive option.

"As [average selling prices] of media-enabled smart phones fall, the mobile category will begin to impact the standalone media player market," the analysts say.

However, the iPhone also follows all the right trends, the researchers note. The emphasis on a natural touch interface for the cellphone — rather than the artificial buttons and wheels of the iPod — is expected to spur sales as the technology improves, and may already be doing this today through the iPod touch, which costs significantly less than the iPhone.

"The difference... between the iPod classic (with a traditional iPod interface) and the iPod touch (with touch-based operation) is a meaningful one," Piper Jaffray notes.

The shifts to sharper video-friendly displays, as well as smaller NAND flash storage in place of hard disks, are also considered important steps that will drive the market once storage is capacious enough to hold more video.

It may be the video itself which proves the real barrier. Apple has a "strong foothold" in video, but the loss of NBC emphasizes just how splintered the market may be, according to the report. Without a clear advantage in content, neither iTunes nor most other providers offering video downloads can expect to take a clear lead in the space no matter how clear the hardware's advantage may be.

Even so, Piper Jaffray maintains a positive outlook on Apple as the Cupertino, California-based company has short-term momentum with a range of new iPods and Macs. Long-term iPhone momentum could also prove decisive in 2009, when Apple is expected to reach the important $300 price point for the handset and the effect of sharing revenue with AT&T is seen at its peak.

"We believe Apple is firing on all cylinders heading into 2008," Piper Jaffray's overview explains.