Turning the iPhone Glitch into Gold

Accessory makers see benefits after Apple CEO Steve Jobs recommends cases to compensate for a flaw in the iPhone 4's antenna

When complaints surfaced that the antenna wasn't working properly on the iPhone 4, Apple (AAPL) told users to hold the device differently or put it in a protective case.

Some owners called the response insensitive. Makers of iPhone accessories, on the other hand, welcomed it. "It is good news," says Tim Hickman, founder and chief executive officer of Hard Candy Cases in San Francisco. Apple's suggestion may add allure to an already popular accessory, he says in an interview with Bloomberg News. "The demand is there and Apple has built it."

The proposed solution may also benefit Belkin Internationaland other accessory sellers—including Apple itself. The cases, typically made of rubber, plastic, or recycled materials, are part of a growing market. Mobile accessories generated $135 million in U.S. revenue in the first quarter, according to NPD Group. That indicates annual sales of more than $500 million. "Consumers are putting more information on these products and they are relying on them more, so they are more willing to invest in protecting them," says Ross Rubin, an analyst at Port Washington (N.Y.)-based NPD.

Apple is selling its own iPhone 4 cases in six colors for $29 apiece. They're made of a piece of rubber known as a "bumper," which surrounds the outer rim of the phone. The accessory doesn't cover the back or front of the device, prompting the iPhonesavior.com blog to call it "the thong underwear of protective iPhone fashion." Shaw Wu, a San Francisco-based analyst with Kaufman Brothers, says Apple may have to start giving away the bumpers with the purchase of a phone as a way to alleviate customer concerns. Natalie Harrison, a spokeswoman for Cupertino (Calif.)-based Apple, declined to comment beyond the company's remarks on the antenna.

DIVERSE ACCESSORIES MARKET

The release of a new iPhone every year since 2007, along with devices like the iPad and iPod, has spawned a diverse accessories market. The products include speakers, chargers, headsets, scratch-retardant screen covers, and exercise kits. IPod accessory makers have even produced an aluminum bulletproof case, a leather holder that resembles underwear, and a docking station that doubles as a toilet-paper holder.

Manufacturers of more traditional fare range from large corporations like Royal Philips Electronics (PHG) to startups such as Hard Candy. Belkin, iFrogz, and Cozip also make phone cases, which generated $23.5 million in U.S. sales in the first quarter, up 43 percent from a year earlier, according to NPD. Apple has been "pretty aggressive" in releasing new gadgets, Mack McCoy, who does marketing for the iPhone accessories division of Playa Vista (Calif.)-based Belkin, tells Bloomberg. "All of this opens up new avenues for us to play with."

For the iPhone 4, Belkin makes an armband holder for runners that costs $24.99. Skinomi, based in Whittier, Calif., makes a see-through case that's designed to protect the iPhone from nicks and scratches.

With the iPhone 4, Apple changed the design of its antenna, embedding it in the steel-frame chassis. It used to be stored internally. Some customers found that their reception drops out if they hold the bottom-left corner of the device. They took to blogs, Google's (GOOG) YouTube, and online forums to air their complaints.

With reporting by Matt Robinson in New York.

Satariano is a reporter for Bloomberg News.

Smartphone Use on the Web Goes 'Mainstream'

More U.S. adults—particularly African Americans and Hispanics—are using smartphones to e-mail, network, surf, and send video, says Pew Research

Smartphone use is gathering steam in the U.S., new research shows. Forty percent of American adults use their cell phones to surf the Web, e-mail, or use instant messaging, according to a study from Pew Research Center in Washington.

That's up from 32 percent a year ago, based on Pew's survey of 2,252 adults ages 18 and older that was released on July 7. "The smartphone has really penetrated the mainstream of American society," says Aaron Smith, a Pew research specialist. In the first quarter, smartphones accounted for 34 percent of all mobile handsets sold in the U.S., up from 31 percent in the fourth quarter of 2009, according to consultant NPD Group.

Smartphone sales are getting a summer boost from last month's introduction of Apple's (AAPL) iPhone 4 from AT&T (T). Motorola's (MOT) Droid X will be released throughVerizon Wireless on July 15.

A separate report suggests that smartphone growth may ebb in the second half of the year as high unemployment and the oil spill in the Gulf of Mexico curb consumer confidence and curtail demand for some nonessential services. "Remarkable smartphone-penetration growth is going to slow down," says Tero Kuittinen, a senior analyst atMKM Partners, an institutional equity trading and research firm in Stamford, Conn., in an interview. After rising for three consecutive months, the Conference Board's Consumer Confidence Index dropped in June to near the level it reached in March. The index is based on a survey of 5,000 U.S. households and reflects consumer sentiment about the economy.

Amid economic woes, the next smartphone growth spurt may come from cheaper devices. "Specifically, consumers want smartphones priced at $100-$190, and our research finds little supply in this price range," Kuittinen wrote in a July 6 MKM report. To keep sales up, device manufacturers may have to face faster-than-expected price drops through 2011, he says. Phone makers such as Huawei and LG (066570:KS) are expected to push into lower-priced smartphones in the next year.

WEB ACCESS VIA OTHER DEVICES

To spur adoption, carriers may need to keep slashing prices on their cheapest smartphone plans as well. AT&T, the second-largest U.S. mobile-service provider, introduced a $15 limited data plan on June 2. In six to nine months, the average smartphone user will pay just $10 a month for data connectivity, down from $15 today, estimates wireless consultant Chetan Sharma. "The barriers to getting data plans are coming down," he says.

Less-expensive data plans may encourage additional consumers to access the Web via smartphones and other mobile devices. Some 3 percent of respondents in the Pew survey own a tablet PC such as an iPad. About 60 percent of them have used the device to access the Internet. About 4 percent own e-book readers such as Amazon.com's (AMZN) Kindle and almost half use the gadgets to access the Web.

Overall, 59 percent of adults in the U.S. go online wirelessly, via Wi-Fi or mobile connections, on cell phones and laptops, up from 51 percent a year ago, according to the Pew report. Among all cell-phone owners, 54 percent used their devices to send photos and videos, 23 percent accessed a social networking site, and 11 percent made a purchase.

Older adults are venturing onto the mobile Web in larger numbers, too. Some 43 percent of people between the ages of 30 and 49 access the Internet, up from 31 percent a year ago, the study showed. Those people are also more likely to send or receive e-mails and instant messages. African American and Hispanic consumers remain at the forefront of mobile-Web adoption. More than 50 percent of English-speaking Hispanic users access the Internet on their phones, compared with 46 percent of African Americans and 33 percent of Caucasians, the Pew study found. "For many Americans, their cell phone is one of the essential utilities of modern life," says Pew's Smith.

Kharif is a reporter for Bloomberg Businessweek in Portland, Ore.