Poor(er) people buy iPhones, drive 3G growth

Suprisingly, lower-income buyers are driving iPhone 3G adoption.

Counter-intuitive as it sounds, lower-income buyers are driving sales of Apple's iPhone 3G, a Web metrics company said Thursday.

Those poorer users may be choosing the iPhone as a substitute for a home PC and a broadband connection, and in effect saving money, said an industry analyst who covers Apple.

According to comScore, which pulled data from its monthly online survey of more than 33,000 US mobile phone users, the strongest part of the iPhone's growth since the July launch of the lower-priced iPhone 3G has come from people who earn less than the US median household income.

While overall iPhone ownership increased 21 percent since June, adoption grew 48 percent among people earning between US$25,000 and $50,000 annually, and increased 46 percent among those earning between $25,000 and $75,000 each year. The median US household income was $50,233 in 2007, the most recent year that data was available from the US Census Bureau.

iPhone ownership among those in the highest-income range -- $100,000 or more -- grew just 16% in the same period, said comScore, even though people in that group accounted for more owners (43%) of all who have an iPhone than any other.

"It's counter-intuitive," said Ezra Gottheil, an analyst for Technology Business Research Inc., talking about the comScore numbers and Apple's reputation as a maker of premium-priced products. "But perhaps what these people are doing is saying 'I have to have a phone no matter what,' so they're buying an iPhone and deferring a home computer."

To Gottheil, the growth of iPhone owners in the lower economic brackets proves a point he's made before: That the smart phone essentially acts as Apple's "netbook", the category of small, lightweight, and most importantly, less-expensive laptops.

"For some people, they have a real computer at home, so they're thinking that [the iPhone] will be their home and play computer," said Gottheil, talking about how the iPhone can be an adequate PC substitute for some. "I need texting, because everyone texts, I need an iPod and I want to consume media, but I can do this with the iPhone. Not having a PC at home means I don't need to pay for Internet access there. My data service [on the iPhone] is my home ISP."

In May, Gottheil released a research note to clients that argued the iPhone could serve as a lower-cost substitute for a PC, and that Apple would capitalize on the strategy. "The iPhone will help Apple resolve a dilemma," Gottheil wrote then. "There is a large potential worldwide market of people who cannot or will not pay the relatively high price for a Mac, but if Apple were to offer a lower-priced PC, it would lose some sales of existing Macs.

"Apple's resolution of this dilemma is the iPhone, a device that, for many potential users, provides sufficient capabilities to substitute for a traditional PC," he continued.

Thursday, a comScore analyst echoed Gottheil. "One actually realizes cost savings when the device is used in lieu of multiple digital devices and services, transforming the iPhone from a luxury item to a practical communication and entertainment tool," said Jen Wu, a senior analyst with comScore, in an e-mail.

The fact, however, is that the iPhone 3G is competitively priced, argued Gottheil, and not really a high-priced product. "They're not actually a premium product," he said. "Right now, the iPhone 3G is not significantly more expensive than other choices in the category. So people might decide that that's their purchase for the year. By combining their phone and phone service, they're able to defer [buying] a PC and [Internet] service. Instead, the iPhone serves their needs."

comScore's data bodes well for Apple going forward, assuming the economy doesn't completely tank. As belts tighten, said Gottheil, buyers may discard ideas of purchasing a new computer but still plunk down money for an iPhone. "Everything depends on how bad things get, of course," he said, adding that if an outright depression hits, all bets are off, even for the iPhone.

Apple sold a record 6.9 million iPhones during its fiscal fourth quarter, which ended in September, the company said as it talked up earnings last week. It also said it had met its goal of 10 million iPhones sold through 2008.

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