Apple's iPhone Hype Doesn't Speak for the Masses

From what I hear, Apple's (AAPL) iPhone is big news these days. I wouldn’t know. In a case of exceptionally poor timing, I scheduled my vacation for mid-June and have traded iPhone hype for breath-taking scenery and limited media access. I’m sure this would be fun for some but I was in media withdrawal, so I’m back on the grid, eager to check out the results of Compete’s recent iPhone survey.

We found that 1.2% of respondents reported they were both likely to buy an iPhone and pay over $500 for it—a substantial increase from the first time we asked (five months ago, when the device was announced and 0.3% of respondents fell into this category). While a smaller percentage of respondents said they were likely to buy the device than five months ago, this decline was more than offset by an increase in the number of shoppers willing to spend over $500 on the device.

Just after the initial announcement of the iPhone in January Compete surveyed 379 people about the device. The survey targeted respondents who had been observed researching an iPod online in the preceding month. In the first week of June, Compete surveyed an additional 680 iPod researchers to look at attitudes toward the iPhone just before its launch. Compete targeted recent iPod shoppers in both surveys in order to keep the results comparable and to target consumers who were more likely to be aware and informed about the iPhone.

The most significant change among respondents: the percentage of shoppers reporting they were “very likely” or “extremely likely” to purchase an iPhone shrank from 26% to 15% between January and the first week of June. As shoppers have become more aware of the device’s price and exact feature set, it is not surprising that the unrealistic expectations of five months ago have been replaced by a more realistic assessment of the iPhone’s actual features and price.

Even though a larger share of shoppers report they now are willing to pay the iPhone’s steep price, they still remain the minority. Among even those who said they are likely to buy an iPhone, only 8% were willing to spend over $500 on it. That said, the percentage is still 8x more than a similar segment was willing to pay in January.

For those interested in the iPhone, switching carriers is not a major impediment. A quarter of the people interested in the iPhone (who are not already AT&T Mobility customers) said they were very likely to switch carriers to get their hands on the phone. Sixty percent of those very likely to buy an iPhone said they would switch, which is consistent with the 59% of the same segment who said back in January that they would switch carriers for the iPhone.

The primary reasons for not switching also remained the same: consumers do not want to pay early termination fees, the price of the iPhone is too high, and, despite wanting the iPhone, most admit that their current carrier’s handset line-up adequately suits their needs. The danger for AT&T’s competitors is that when their customers’ contracts lapse and the price of the iPhone drops, two of the major switching barriers will be removed.

When it comes to the iPhone itself, respondents primarily care about whether or not it will work as a high-quality phone. Surpassing issues of design and music integration, consumers said the top criteria in their decision to purchase an iPhone were price, phone performance, battery life and ease of use. These are consistent with the top criteria consumers use to evaluate any phone. “Overall design and look of the device” scored much lower than usual as an area of concern, presumably because consumers are already confident in the iPhone’s design and have shifted their concerns to other aspects of its functionality.

And even though issues about the touchscreen have gotten a lot of ink lately, the concern didn’t make the top three. Only 16% of respondents said they were concerned about the difficulty of texting using a touchscreen compared to 25% who were worried about the phone functionality not being as well developed as the music functionality.

On the other hand, consumers did express worry about the device’s data connection speeds. Given the difficulty of representing data connection speeds to general consumers, Compete asked, “If Internet browsing speed on the iPhone was closer to a dial-up modem than to a cable/broadband modem what impact would this have on your decision to purchase the iPhone?” Fifty-eight percent of those who said they were likely to buy an iPhone reported that this information would make them less likely to purchase an iPhone.

AT&T will have to carefully set consumers’ expectations about when and where the device will be able to surf the Internet at broadband speeds (and where consumers will have to pay data charges). This opens up an opportunity for the other service providers to talk about their networks and potentially challenge the iPhone.

Overall, the iPhone must work as a phone before it can expand its market beyond diehards. In the meantime, other manufacturers have an opportunity to leverage their capabilities and reputations as makers of great phones to deliver better products at affordable prices. It’s worth remembering that for most consumers, a phone is just a phone and will stay that way for quite a while. In Compete’s survey, 55% of respondents said they would still rather carry separate devices for their music and phone calls.

Where do Compete's traffic numbers come from?

Comments

[completeidiot:]

A lot of people are expecting the iPhone to be as popular as the iPod, but there is one important aspect that I think a lot of people are missing. About half of the people I know that have an iPod received it as a gift. It's much harder to give someone an iPhone as a gift, because you have to worry about their existing cellphone coverage and whether or not they can switch to AT&T. Who wants to give someone a gift and then say "Okay, now go to an AT&T store and pay for a new cellphone plan to use it".

2007 Jun 27 07:38 AM

[Tom B:]

I got my iPod as a gift. I gave my wife one, as a gift. It's become a necessity now, though. My next one will be purchased.

The iPhone is a revolution in itself, in that every other "smartphone" to date, well, sucks.

But it is also a DEFENSIVE PRODUCT. It prevents all other cell phone makers from ever having a chance to credibly undermine iPod sales.

Regarding the limitations: iPhone 1.5, will no doubt have improvements. And stodgy old ATT is bigger through M&A than it was a few years ago and has a new CEO. Past performance (network wise) is not a reliable predictor of future performance.

2007 Jun 27 09:04 AM

[Werlingdervish:]

Activation is easy to do on iTunes. I understand it can be given as a gift.

2007 Jun 27 08:05 AM

[Malkiel:]

There's a whole literature going back 60 years explaining the psychology of owning "prestige" products and giving some insight into the phenomenon of luxury prestige goods like certain cars being highly sought after by classes of people who aren't considered to be in the intended demographic for the product--the 1960's working class families with their new Ford Thunderbird convertibles, the 1980's new college grads with their new Porsche 944's, etc. A big demographic for this phone will be teenagers into gaming who somehow come up with money for gaming machines and accessories and will come up with the money to own and maintain one of these. Apple has set a bar of technological cachet with this device that competitors will need to meet regardless of any deficiencies in the rollout version of the product...

2007 Jun 27 10:25 AM