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Apple can do whatever they want with downgrades (I'd like them to allow that, but it won't happen). The mistake, though, is shattering the performance with every single iOS update of non-latest devices. Even on one major version. iOS 9 is bad on iPod Touch 5G, iOS 7 is better but heaps worse than iOS 6. Same applies for iPad 4, for iPhones, for everything.
So you either allow downgrading or test the heck out of older devices and guarantee trouble-free performance. But the first update cannot shatter performance as it is currently doing. I shouldn't fear updating because I don't know if my devices will be a lagfest if I actually update. If Apple allows updating, then it should work flawlessly. Maybe my expectations are too high, but that's how I think it should be...
Problem with that expectation (at least for older generations) is ARM has still been getting 1.5-2x performance bumps between generations. After 2 years worth of iDevice upgrades, you'd already have somewhere between 300-400% processing power of your old iDevice. Apple would either have to dumb down iOS updates significantly so devices that are essentially at 10-50% processing power of the latest model can cope well or they could just flat out not release a major firmware update for devices that are merely 2-3 years old. Granted, the option to downgrade would sure be appreciated. Mind, with A8 matching up to Atom and A9 matching up to Core M, I reckon we're close to or already at the level where further iOS updates wouldn't tax the CPU/GPU for UI and most tasks bar gaming, photo/video editing, etc.

As for shattering performance, iOS 7 is a bit of a special case since Apple pretty much overhauled UI. Mind, with animations disabled, iOS 7 actually wasn't all that bad. iOS 8 was even "heavier" thanks to new features. I find iOS 9 to be a refinement at least for devices with at least 1GB RAM. It certainly ran better on my iPad 3, 4 and Air than iOS 8 did. I actually found iPad 4 performance on iOS 7 to iOS 9 to be acceptable even if it's not quite silky smooth like iOS 6.

Also, Apple already skimps on RAM but that's even more pronounced on the iPod Touch. The Touch often gets just 1/2 the RAM that a similar iPhone would so it's already RAM-starved at launch, nevermind firmware updates. For the most part, updating to the next major firmware update (on iPhone and iPad) has been okay. It's the second major firmware update where things start to go iffy.

That said, folks on MacRumors tend to be power users with higher performance requirements/expectations. Real world, I reckon most people are more like my mom who is perfectly content even with an "ancient" iPad 3.
 
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Problem with that expectation (at least for older generations) is ARM has still been getting 1.5-2x performance bumps between generations. After 2 years worth of iDevice upgrades, you'd already have somewhere between 300-400% processing power of your old iDevice. Apple would either have to dumb down iOS updates significantly so devices that are essentially at 10-50% processing power of the latest model can cope well or they could just flat out not release a major firmware update for devices that are merely 2-3 years old. Granted, the option to downgrade would sure be appreciated. Mind, with A8 matching up to Atom and A9 matching up to Core M, I reckon we're close to or already at the level where further iOS updates wouldn't tax the CPU/GPU for UI and most tasks bar gaming, photo/video editing, etc.

As for shattering performance, iOS 7 is a bit of a special case since Apple pretty much overhauled UI. Mind, with animations disabled, iOS 7 actually wasn't all that bad. iOS 8 was even "heavier" thanks to new features. I find iOS 9 to be a refinement at least for devices with at least 1GB RAM. It certainly ran better on my iPad 3, 4 and Air than iOS 8 did. I actually found iPad 4 performance on iOS 7 to iOS 9 to be acceptable even if it's not quite silky smooth like iOS 6.

Also, Apple already skimps on RAM but that's even more pronounced on the iPod Touch. The Touch often gets just 1/2 the RAM that a similar iPhone would so it's already RAM-starved at launch, nevermind firmware updates. For the most part, updating to the next major firmware update (on iPhone and iPad) has been okay. It's the second major firmware update where things start to go iffy.

That said, folks on MacRumors tend to be power users with higher performance requirements/expectations. Real world, I reckon most people are more like my mom who is perfectly content even with an "ancient" iPad 3.

As much as I would want it to be different, I hadn't considered and you are completely right on sheer processing power difference between devices, I guess that if they want to at least scratch the power of new devices they have to shatter old devices. They could wait a little longer to increase the processing requirements of the new versions so that older devices work better (Though I guess this is dumbing-down iOS versions as you said and they probably do not want to do that).

OS power requirements will be increasing, but they could try a little harder to maintain good performance on older devices for a little longer. As I said previously, I cannot expect a device that was launched with iOS 6 to run flawlessly up to iOS 11-12, but it should run as good as new up to let's say iOS 9. On iOS 10 and 11 a bit worse maybe but nothing awful as it is now and cut support on iOS 12 and increase the processing requirements more than earlier. (They can do it like iOS 9 for example. I do not have an iPad 4 on 9 but you said and I have read here that they work better.) Everyone happy as iPad 4 got 5 years of near-flawless updates and then when they couldn't maintain requirements any longer they cut support. Regarding under-powered devices there's nothing they can do except for not releasing them underpowered (iPad 1 and 3 for example.)

Also, you said that ARM processors are reaching computer power, so now they can do what I said as processors aren't that weak nowadays, so no need to quadruple requirements in two years.
I don't consider myself a power user, but yes, I guess I have higher expectations than most standard users regarding OS performance itself. Regarding apps, for example (mainly games) I understand that some won't work flawlessly on older devices as in this case creating them to take advantage of the new devices' sheer processing power has a lot of advantages (more features, better graphics, etc.) so I can cope with a bit of lagging on the newer games. What I cannot accept, though, is that due to the increasing requirements of the OS, the device has less power for apps and older apps that worked well now don't and lag a lot.

Regarding the iPod Touch they should give the same RAM (not the same chip if they want) than the iPhone from the same year if they want it to work better for a longer period of time but Apple doesn't care about iPods anymore so it won't happen.
 
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