Apple's iPod touch revival is the company's most immediate solution to diversifying revenue (AAPL)

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Apple launched the next-generation iPod touch on Tuesday, marking the hardware’s first update in nearly four years.

While the new iPod touch, which starts at $199 for the 32 GB model, looks similar to the previous version, the most important upgrades are those under the hood: It boasts the A10 Fusion chip — first introduced with the iPhone 7 series — which offers up to two times faster CPU performance and up to three times faster graphics than the A8 chip from the previous model. This addition enables support for Apple’s ARKit augmented reality (AR) apps and Group FaceTime calls.

Here’s what it means: Apple’s been facing more pressure than ever to deliver on another successful product that can help diversify its revenue beyond the iPhone and serve as a cynosure for its services ecosystem — and the iPod touch appears to be Apple’s most immediate solution.

Apple’s positioning the new affordable iPod touch as a big driver of its Services segment. As the company continues to face a downturn in smartphone shipments, it’s becoming increasingly important for Apple to make its revenue less dependent on the iPhone and more dependent on other devices that leverage its services, as that will allow it to drive value across its business and secure future growth. 

The company’s stressing its new services offerings — spanning news, gaming, music, and video — that provide a continuous stream of revenue as the key use cases for the new iPod touch. Nevertheless, gaming is highlighted the most for the new device; let’s dig into Apple’s efforts to optimize the device for gaming: 

• The enhancements that arise from the A10 Fusion chip are incredibly important to the mobile gaming experience. The faster CPU and graphics performance will enable support for iOS developers’ bigger and more detail-rich mobile games on the device. It also opens up a new category of games and experiences previously unavailable on the iPod — AR games.
• The iPod touch will house the upcoming Apple Arcade subscription service. Apple Arcade, which is launching this fall with 100+ new and exclusive games and is said to be a “Netflix of gaming,” is anticipated to bring the best of the App Store — which is already the world’s largest gaming platform. 

The bigger picture: The new device is a move to keep iOS adoption and usage growing without totally pivoting away from Apple’s strategy of rolling out premium, higher-priced devices.

Apple has historically had issues pushing into emerging markets due to the asymmetry of the cost of an iPhone and the average price of a smartphone in these regions — but the new iPod touch can alleviate this issue, at least for now.

That’s because the device serves as an option for consumers who desire iOS applications but don’t want — or can’t afford — an iPhone. And since the new iPod touch still works like a phone but relies on Wi-Fi instead of cellular connectivity — meaning users don’t have to pay for a monthly data plan — it’s an even cheaper way to access everything iOS offers.

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