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Price of older iPhone — free — drives demand for Apple

SAN FRANCISCO — Apple's iPhone 3GS model is more than 2 years old and shunned by gadget snobs, but it's turning into one of the company's bigger weapons against devices running Google's Android software this holiday season.

When Apple rolled out its new iPhone 4S on Oct. 4, it slashed the price of the 3GS model to zero — if it's purchased with a contract. The decision thrust the company into the free-phone market for the first time and will help the 3GS account for as much as 20 percent of iPhone sales this quarter, said Shaw Wu, an analyst with Sterne Agee in San Francisco.

The move pits Apple's iPhone against bargain Android phones, without much damage to the company's profit. That's because Apple gets cost savings from using older, cheaper parts. And though the device lacks some of the whiz-bang features of the 4S, such as the voice-activated assistant Siri, it's still better than rivals of the same price, said Roger Entner, founder of market research firm Recon Analytics.

"Apple can shovel them out by the millions," he said. "What free phone or even $50 phone is going to be more appealing to consumers than an iPhone 3GS?"

AT&T sold out its stocks of iPhone 3GS shortly after the price change, AT&T Mobility president Ralph de la Vega told analysts last month. AT&T, which is the only U.S. carrier distributing the iPhone 3GS, has seen "tremendous demand," he said.

Roberta Thomson, a spokeswoman for Dallas-based AT&T, declined to comment, as did Natalie Kerris at Apple.

Apple and AT&T have used a similar strategy before, but not to this degree. The carrier sold millions of iPhone 3GS, then priced at $99, after the introduction of the iPhone 4 last June. In the quarter ended in September, "it's not crazy" to figure that half of AT&T's iPhone sales were 3GS models, said Craig Moffett, a Sanford C. Bernstein analyst in New York.

The repriced "free" 3GS went on sale in October, opening up the third and lowest pricing tier. The iPhone 4S sells for between $199 and $399, while the iPhone 4 goes for $99. Total revenue from the iPhone reached $11 billion last quarter, making it Apple's best-selling product. The company expects to reach record sales of the device this quarter.

The 3GS is free only because of subsidies — Apple still makes money on the hardware by selling it to carriers. The company gets about $381 per phone, according to Jitendra Waral and Anand Srinivasan, analysts for Bloomberg Industries.

While that's well below the $620 it receives for the iPhone 4S, Apple spends much less to build an iPhone 3GS because of its older components.

Price of older iPhone — free — drives demand for Apple 11/05/11 [Last modified: Friday, November 4, 2011 7:39pm]
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