When the iPod Touch was first released it was a though of as a striped down iPhone without the telephone. Apple soon made the distinction clear, the iPod Touch was branded a gaming machine and not inferior to the iPhone in any way. This approach has been extremely successful. Another advantage Apple has is the compatibility of games across multiple devices.
I can’t say I disagree. Both my son and daughter have Nintendo DS gaming devices and a large catalog of Mario and Pokemon games. However, I passed my second gen iPod Touch down to my son when I got my iPhones earlier this year. My son had hardly touched his DS since he discovered Angry Birds and my daughter routinely burns through my wife’s iPhone battery playing Kimimon.