i dont think its down to that at all. the ipod classics, the touch and the iphone are all very good IF you dont use the eq. my iphone is very nearly indistinguishable from my sony nwz-a816 when no eq is used and this is with whatever material i throw at them, including my own high quality encoded songs.
however, and ive said this before, the apples ALL do the same thing and fall flat on their faces when any kind of eq is used. the moment you select one of the presets on the iphone, even the most gentle of the lot, distortion creeps in, the treble is harsh and thrashy and the whole presentation is very poor. compare that to the sony player which comes in to its own when the eq is applied. that Sony sound (tm) is just fantastic and really gets the toes tappin and it is genuinely the best mp3 player ive ever heard (and ive owned a lot including the cowan d2)
the iphone makes a great source and using it to drive my amplifer and it outperforms the sony using the headphone output and even more so when using the dock's dedicated line-out so the amplification isnt the problem. the material i use isnt either given that its the same on both players. it is purely down to the software equalisers.
...its almost as if the eq presets are pushing up the bass and treble without compensating for that and lowering the overall volume, consiquently pushing the signal in to clipping and causing this distortion even at low volumes.