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Analyst: Free iPhone 3GS Could  Spell Trouble for Rivals
Analyst: Free iPhone 3GS Could Spell Trouble for Rivals

By Jennifer LeClaire
October 5, 2011 11:22AM

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"There is an entire group of people who have not been willing to get a smartphone, not because of the monthly outlay -- although there are a group of people who can't afford that -- but because they simply don't like spending money on phones," said analyst Avi Greengart. "They actually think they should get a free one."
 

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Apple introduced the iPhone 4S yesterday. Although some industry watchers are expressing disappointment that it wasn't the much-hyped iPhone 5, others are pointing to what they see as the buried story: the broad range of price points.

With a two-year contract with AT&T, Verizon Wireless or Sprint, the iPhone 4S starts at $199 for the 16GB model and $299 for the 32GB model in the U.S. -- and even adds the new 64GB model for $399 for heavy media users.

But Apple didn't remove its old inventory from the market. In fact, apple heavily discounted it. Now, the iPhone 4 is selling for just $99 and iPhone 3GS will be available for free with a two-year contract. The keyword here is free -- and analysts expect that to help Apple compete with other handset makers, including Android devices.

Tapping Pent-Up Demand

"Apple dramatically expanded the price points that the iPhone is available at and the distribution," said Avi Greengart, an analyst at Current Analysis. "The key competitive takeaway that I got is this: If your free phone isn't better than the iPhone 3GS, you are in trouble. If you are at pretty much any carrier, if your $99 mid-tier phone isn't better than the iPhone 4, you are in trouble."

T-Mobile appears to have the most to lose from the deal in the U.S., since it doesn't carry the iPhone. But wireless carriers that carry the iPhone in other countries are fewer and farther between. So the expanded price points are not only good for Apple, but for the carriers that offer the devices around the world who can now tap into the pent-up demand for a more affordable iPhone.

"While it is undeniable that the purchase price of the device has little bearing in terms of the overall cost of what you include, consumer behavior is different," Greengart said. "Consumers do care if they are paying $50 or $100 or $200 or nothing. It deeply influences consumer behavior."

A 3GS Is Still an iPhone

Consider the statistics: More than 172 million people in the United States use feature phones, according to comScore, and about 61.5 million use smartphones. Globally, feature phones are even more pervasive. That means a huge market potential for smartphone makers that can offer affordable devices.

"There is an entire group of people who have not been willing to get a smartphone, not because of the monthly outlay -- although there are a group of people who can't afford that -- but because they simply don't like spending money on phones," Greengart said. "They actually think they should get a free one."

Greengart's overarching point: Free phones are not as good as an iPhone 3GS. Consumers who opt for an iPhone 3GS may not have the latest and greatest iPhone. But they nonetheless have an iPhone. And with an iPhone 3GS, consumers have access to most of the apps and iTunes content and the Apple user interface.

"It's also interesting to note that the iPhone 4S is an incremental update to the iPhone 4 but the iPhone 4 is the best-selling smartphone in the world right now -- and that's after being on the market for 16 months," Greengart said. "So consumers really like the iPhone 4 and I think they will like the iPhone 4S better."
 

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