While Appleis public focus recently has been on the iPhone, the company has likely been focusing on the iPod behind the scenes. Piper Jaffray analyst Gene Munster expects consumers will see the fruits of those labors before the end of the year in the form of new iPods with iPhone-like features and a new operating system: OS X.

"We believe the iPhone reveals much of what the iPod will soon be. Specifically, we expect Apple to release high capacity iPods based on OS X sometime during or before MacWorld i08 in January," he said. "These iPods will likely have touch screen media features similar to the iPhone, but will not have the wireless phone or internet features."

Based on his research, Mr. Munster sees iPhone buyers as cell phone owners looking for a better smartphone. For these people, the iPod features are an added bonus. iPod owners, however, are looking for Apple to release better iPods, so for now are looking at the iPhone. iPhone sales may be eating into iPod sales right now, but that would likely change once new iPod models are released.

iPhone margins could also see a boost once new iPods are released. If new media player models do sport some of the same technology found in the iPhone, economies of scale will have a positive effect.

Some analysts have estimated that iPhone gross margins could be as high as 60 percent -- a number that Mr. Munster feels is skewed to the high end because the majority of iPhone customers bought the 8GB model on launch day.

He added "We believe iPhone margins are inline or slightly higher than corporate averages of about 30 percent. However, if future iPods use similar parts and software, the OS X-based iPods will add economies of scale to the iPhone business" and will ultimately improve gross margins and Appleis bottom line.

Mr. Munster is maintaining his "Outperform" rating and US$160 target price for Apple stock. Apple is currently trading in the pre-market at $132.62, up 0.35 (0.26%).

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