http://www.businessweek.com/technology/content/jul2009/tc20090726_261031_page_2.htm

I was recently cleaning out a closet and came across an interesting artifact: my first iPod.

It was nearly eight years ago that I was among the very first people in New York City to carry around the first-generation iPod. About the size of a pack of cigarettes, it was advertised with the tagline "A thousand songs in your pocket." I can even remember the song used in the first TV spot: Take California by The Propellerheads.

Since then, I've upgraded to a 2007 model boasting a 160-gigabyte hard drive that makes holding a mere thousand songs seem quaint. Before long, I will no doubt be waxing nostalgic about this music player as well—one that, at not even half full, holds 5,231 songs, 141 videos, and 228 podcasts.

First Quarterly Drop in iPod Sales

The iPod as many of us have known it is on the wane and giving way to a more feature-rich family of devices that in time will bear little resemblance to the trailblazing digital music players that helped Apple capture 70% of the North American market. Evidence of the iPod's decline came July 21, when Apple disclosed its first quarterly decline in iPods sold. In the three months ended in June, Apple (AAPL) sold 10.2 million iPods, versus 11 million a year earlier.

Anticipation of the drop-off is "one of the original reasons" Apple developed the iPhone and the WiFi-enabled iPod touch, Apple Chief Financial Officer Peter Oppenheimer said on a July 21 conference call with analysts. Apple is prepared for lower sales of what it calls "pocket products:" the iPod shuffle, nano, and classic.

At the same time, the iPod business "will last for many, many years," Apple believes. The company has good reason to want to extend the life of a product line that's generated $38 billion on sales of 218 million units, catapulting Apple ahead of SanDisk (SNDK), Microsoft (MSFT), Toshiba (6502.T), and others.

Flash Memory Is Cheaper

What will iPod's next generation look like? Most of Apple's energy is going to be devoted to the iPod touch, the most advanced and versatile version of the iPod.

My prediction is that one of the first casualties of Apple's emphasis will be the hard drive-based iPod classic. Flash memory is cheaper, consumes less power, and resists abuse better than hard drives, so future high-capacity iPods will most likely be based on flash.

I'm also betting those high-capacity models will look more like the iPod touch, and less like my iPod classic. If history is any judge, Apple will revise its iPod lineup in September, as it has every year since 2005.

A Mic Would Broaden Appeal

Besides a refresh of the iPod nano (it's been revised every fall since its introduction), you can also expect a more advanced version of the iPod touch. The next touch will come with 64GB of flash memory.

And since it runs virtually all of the same applications that the iPhone does, then it stands to reason that the touch will starting taking on more hardware features to accommodate applications. Aside from music and video, it's now already marketed as a handheld gaming machine, a communications device, and a handheld Web device. In a limited way it can even be used for navigation.

Over time, the touch will do even more. Consider its appeal if Apple were to add a microphone that lets you make calls on Skype (EBAY) or other Internet-calling services, without the need for the awkward headset that's required for such calls now.

You could talk on it as if it were an iPhone, and the mic would put in double duty for simple audio recordings like meetings, lectures, and voice memos.

How About a Camera?

The touch should really have a camera, too. And is there any reason why that camera can't be better than the one in the iPhone? The latest iPhone 3GS sports a 3-megapixel camera sensor, while the latest phones from Nokia (NOK) have an 8-megapixel sensor. Apple could split the difference and give the touch a 5- or 6-megapixel sensor, giving it the ability to take really gorgeous pictures.

And if the touch has a camera, then it should support video. All that added memory leaves plenty of room for clips, and the Wi-Fi connection makes it easy to send them directly to YouTube (GOOG) and other video-sharing sites. And while Apple has resisted adding memory-card slots to its handhelds in the past, now that the Mac has a slot for SD memory cards, is there any reason the iPod touch (and for that matter a future model of the iPhone) can't have a slot for Mini-SD cards for added storage capacity?

While we're wish-listing, why should the iPhone be the only device in Apple's lineup that can help you get from one place to another? Why not add a GPS chipset, and let the iPod touch become a full-fledged personal navigation device? The touch's limited navigation features currently only work when Wi-Fi is present. This is fine when you're in a city, but no help when you're on the road. With excellent personal navigation devices from Garmin (GRMN) and TomTom (TOM2.AS) selling for as low as $120—more than $100 below the entry-level touch—why consider navigation a premium, iPhone-only feature?

However Apple answers that question, what's clear is that traditional versions of the device are a thing of the past—and future iterations will have a long and vibrant future.