iPod's Dominance Is Risky Business

Despite their similar design and ease-of-use advantages, the iPod line has had one thing going for it that Apple's computers did not: price competitiveness. Apple has repeatedly cut iPod prices and introduced newer, lower-priced lines. Indeed, when the company introduced its flash memory-based iPod shuffles in January, analysts noted that they were among the most aggressively priced devices on the market in terms of cost per megabyte.

But in rolling out its new superiorly designed iPod nano last week, Apple took a step back with price. Apple is offering the two flash-based nano models at the same price as the iPod mini models they replace. But both nano models have 2 gigabytes less space than the corresponding mini models. Put another way, Apple is asking customers to pay $50 more for the same amount of storage space as before.

That's the opposite of how things usually work; typically over time, prices drop as performance -- or storage -- increases. And this latest pricing strategy may give competitors an opening, analysts say. Some may well be able to offer twice as much storage space as Apple is offering at the same price.

"There is an opportunity to compare specs there that will be favorable to competitors," says Jon Erensen, a senior analyst with Gartner, an industry research firm. "Apple is making a bet that their player is the easiest to use [and that the nano's] sleek form factor is going to sell the device."

That increased competition could come this holiday season. Last year, the iPod was the device to have, as sales more than quadrupled to $1.2 billion. But there was little competition -- not only from other music players but from other consumer electronics products.

The competition for consumers' holiday dollars could well be more intense this season. Not only is Sony(SNE Quote) expected to post strong sales of the PSP, but analysts expect Microsoft(MSFT Quote) to have a big hit with its forthcoming Xbox 360 game console. Further, the overall reduction in the price of flat-screen televisions could lead to a big selling season for those devices.