I am currently developing an iOS application. I'm considering not supporting anything less than iOS 3.1. I was wondering, can I expect a huge backlash from customers that buy this application and try to use it on devices that haven't been updated in years?
Just to add to the good data already available, here's some June 2011 data from a free, "who buys the next round" app, which may be a bit more representative than Instapaper:
While not quite as high as the percentage of Instapaper users, more than 95% on iOS 4 suggests you won't be missing out on a big number of users.
You can find Marco Arment's stats on iOS version he collected from his Instapaper app (as CanuckSkier say in the comment, Instapaper is generally used by tech-savvy people, so "real"-people usage might be slightly less).
Here's a graph:
As you can see, at least 98% of users are already on iOS 4.0 and 96% on 4.2. So I guess you can safely stop supporting iOS 3.x.
You can check for yourself. Look in the iTunes app store for popular apps which cater to the same customer demographic as yours, and which only run on later OS versions (3.2, or 4.1 or later). Check the reviews for those apps, and see the proportion of negative comments they get for not supporting such-and-such.
Usually the amount is tiny, as users of older devices, and people who don't update their OS, don't buy as many apps as people who have the latest devices and/or upgrade their OS. Many popular and highly rated apps are only compatible with very recent OS versions.
So, no huge backlash.
This is more of an opinion answer, but I suspect that the number of people with old iOS versions will decrease as time goes on, whereas the number of people with up-to-date iOS versions will increase a lot, both as more people buy iOS devices and as iCloud makes software updates easier (no iTunes required) and faster (delta updates).
Time spent supporting even 3.1 is worth less as time goes on, whereas time spent focusing on the new features in later versions pays off now, and keeps paying off.