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BURLINGAME, Calif. -- Apple's new iPad aims to remake a market touched on by laptops, tablet computers, netbooks and even the iPod--portable devices for the creation and consumption of media, largely text and video. That also hits its increasingly active competitor Google.



The iPad met a mixture of reviews Wednesday, largely inflected with disappointment by people who were expecting much more--a salvation of journalism, the remaking of reading, destruction of the broadcast world, something like that. On its own, however, it may be a worthy device with an acceptable price point (one likely to fall) that should attract a lot of third-party developers. There is also talk of a new kind of electronic bookstore, which should make publishers happy.

Google ( GOOG - news - people ), on the other hand, may not be so amused. Chief Executive Eric Schmidt has talked openly of creating a powerful and cheap netbook computer by late 2010. Judging from his words, the Google netbook (or, given the way fashions are trending, perhaps now a tablet) will be priced far below Apple's ( AAPL - news - people ) range of $499 to $829.

Both companies are aiming at the business market, but with very different intentions. Apple, long a seller of hardware, is thinking in terms of something cheaper than a laptop, or better than a netbook. Google sees its device as a means to accessing its main businesses of Internet search and, increasingly, Internet-based office applications like word processing. The Google machine might even be subsidized like a cellphone, thrown on at a deep discount for a subscriber to Google Apps.

The two companies have been coming at each other for a while. Google's Nexus One phone is a rival to Apple's iPhone, and Apple is said to be building big data centers to offer online services a la Google. Earlier this week, Google released software for the iPhone that lets users make cheap long distance calls via the Internet, avoiding some charges by phone companies. Google tried this last year, but Apple did not approve the product. Schmidt resigned from Apple's board soon after. The new Google software can be accessed via the Internet, dodging Apple's control.



Who wins this battle may depend on the market result of corporate style. Both Apple and Google have outstanding recent track records on innovation and disruption, but the companies go about it in very different ways. Older Apple, schooled in selling delightful consumer technology products, has a discipline of process control. Its stuff comes out with the hardware and software created in parallel for maximum performance. With the iPod music player, the online store became part of that process. New versions of products roll out, and sometimes (as with the Mac or the iPhone) outside developers contribute ancillary products, but Apple's taste in the matter rules.

According to early reports, the iPod Touch was a hot seller over the holidays. At the same time, sales of the mighty iPhone have been slowing in some places. Is there a connection between the two?

BusinessWeek says the Touch’s good fortune is partly a matter of economics and partly its functionality. While the iPod Touch is priced from $229 to $399, it is more affordable than the iPhone, as consumers aren’t saddled with a pricey monthly phone plan.

Plus, with the growing number of games on Apple (nasdaq: AAPL - news - people )’s App Store, the iPod Touch is presenting buyers with an alternative to a Nintendo (other-otc: NTDOY.PK - news - people ) DS or Sony (nyse: SNE - news - people ) PSP.

Kleiner Perkins Caufield & Byers partner Matt Murphy, who manages its $100 million iFund for App Store developers, told BusinessWeek that aside from the Touch becoming a “legitimate gaming platform,” young people are using it for social networking and other applications. He added that for some people, “it’s becoming a computer replacement.”

BusinessWeek also references a note from BMO Capital Markets analyst Keith Bachman that found Canadian telco Rogers Communications (nyse: RCI - news - people ) sold 130,000 iPhones in the December quarter, significantly lower than 235,000 in the previous quarter. We won’t know the latest iPhone sales numbers in the U.S. until AT&T (nyse: T - news - people )’s latest earnings are released in at the end of the month.

Another interesting datapoint on the rising popularity of the Touch comes from mobile ad network AdMob. Its has released December figures Thursday, and while our usual caveat that these figures are from only one vendor still stands, they show a jump in the number of ads it served up to iPod Touch users—from 86 million in November to 292 million in December. The requests doubled overnight on Christmas, and remained strong throughout the close of the month.

The Good: Built-in Wi-Fi for music downloads and Web access, large screen, a wealth of applications

The Bad: Slightly underpowered external speakers

The Bottom Line: A poor man's iPhone, the Touch offers wireless music downloads, mobile Web access, and hundreds of applications while on the go

They say sequels often fail to live up to the original. That's not so with the second generation of Apple's (AAPL) iPod Touch. Apple has managed to make the Touch look better, work better, and deliver more features—all for a $229 starting price, significantly cheaper than the previous $299 entry-level version. The changes, while subtle, are so significant that I give the second-generation Touch a rare perfect score.

The Touch, while an iPod, is close to the iPhone in lineage. It has the same touchscreen, plays music and videos the same way, and includes a wireless Internet connection that lets you access the Web from your home network and wireless hotspots, such as those set up by AT&T (T) in Starbucks (SBUX).

Apple tweaked the look of the Touch, too. It's a lot thinner than the previous Touch, measuring 4.1 inches by 2.4 inches by 0.33 inches, and weighs a scant 4.05 ounces. The back sports a contoured stainless-steel casing, whereas the updated iPhone switches to glossy black or white plastic.

New Speakers

A year ago, when I reviewed (BusinessWeek.com, 10/19/07) the original Touch, many readers took me to task for complaining that there was no dedicated volume button for music and no built-in speaker for listening to music without headphones. In the new generation, Apple's engineers addressed both complaints by adding a rocker volume button on the left side and speakers on the bottom. They also added software to let you fetch e-mail and use other applications previously limited to the iPhone.

Perhaps the biggest shocker is Apple's decision to sell $29 headphones with a built-in microphone. The upshot? Users can download third-party applications from iTunes that will turn a Web-connected Touch into a Skype (EBAY) phone. In effect, the combination of features turns your Touch into a poor man's iPhone, letting you make cheap calls anywhere around the world without signing up for AT&T's expensive two-year service contract.

I've always felt the Touch ($229 to start) has stood in the shadow of the iPhone. But Apple's decision to let developers deliver software to both the Touch and the iPhone actually makes the Touch a more important product for Apple in my mind.

Blackjack, Too

The devices' versatility is a key consideration. Not only is it a great high-end iPod but it's also fast becoming a neat handheld game machine for casual users. In the few weeks I've been using it, I've found myself launching a quick game of blackjack or slots while standing in a line or waiting in an airport.

And because of its great processing power, accelerometer, wireless access, and surprisingly decent battery life, the Touch is limited only by the imaginations of a growing stable of developers. One example: Wireless-music company Sonos in late October offered users a free application that turns the Touch into an additional wireless controller for accessing music from a PC, Mac, or online music-subscription service.

Another great new piece of software on the Touch is called Genius. With it, you select a song and press an icon that looks like an atom on the top of the screen. The software creates a playlist of tracks in your music library, based in part on Gracenote's digital music-database technology, that are similar.

Fatter Margins

The iPhone can do all this, too. Because the Touch does not include a 3G radio, though, the company likely gets slightly better margins with each Touch sold.

The Touch now sits in a class by itself. No longer simply a high-end iPod, it has become the foundation of what's sure to be an increasingly important handheld computing platform for Apple. Rivals should take note: This is one Apple product that could seriously take a bite out of the competition.