iPhone Price Drop Is A Bad Sign

Apple's (APPL) price cut on the iPhone means the phone is not selling the way they had hoped. I believe this can be attributed to slowing consumer discretionary spending, which will really hurt Apple.

The company does not usually cut prices this drastically - just look at its iPod line and you will see that not only were iPods hard to come by due to high demand when they first came out, but the prices were not lowered till at least a year after the release. This price cut on iPhone reiterates my concern about slowing consumer spending - either that or the phone sucks.

Bottom line - I recommend selling some AAPL if you have not done so already. I sold mine yesterday at the $145 level.

Full Disclosure: I do not own AAPL but my position change anytime without notice.

AAPL 1-yr chart:

Comments

[mike hough]

Your logic does not correspond with the facts. iPhone was already the best selling Smartphone outselling Blackberry and all other Smartphones in the first month sales (iSuppli survey). It is on target to beat Apple's sales estimates (Piper Jaffray survey conducted before the price reduction).

You cannot therefore claim "the phone is not selling the way they had hoped." Additionally you cannot claim "I believe this can be attributed to slowing consumer discretionary spending".

The does NOT mean that selling stock is a bad idea as the market often moves in an irrational way. But please do not make claims which fly in the face of reason. Give your claims some context as any responsible journalist should. Your readers deserve this.

Meanwhile I have sold some stock but, armed with the facts above, I am better prepared than I would be if I followed your article and concluded that Apple's iPhone was a failure. It clearly is not.

Your readers might also like to consider selling RIMM (Blackberry) and other Smartphone stocks which now have to compete with a much lower priced iPhone which was already outselling them all! They might also like to know that iPhone is already selling more than all Microsoft based phones combined even with your assumption that it is a 'failure'.

[peter02l]

In an interview with Wall Street Journal, Steve Jobs said he is very pleased with how the iPhone is selling. Are you suggesting that he is lying? Read the article. The price drop suggests nothing of the sort.

[FaisalLaljee]

I am not suggesting he is lying. but do you really think he will ever say that he is displeased?

[peter02l]

As a matter of fact, yes I do. But if her were not pleased, he would definately say he is.
Let's not put everone in the same boat as the Bush administration.

[preinitz]

Apple is clearing inventory to make room for the new model iphone.

[Tom B]

I think the goal of the price drop is to accelerate the demise of Nokia, Motorola, Palm, RIMM, Sprint, Verizon, NBC/Universal and etc. You get my drift.

[yesssss]

Somebody finally gets it. Millions of "hurry up and get it done" dollars invested by Apples competition negated in one fell stroke. No "recoup our investment" initial high price for them, they must sell at a loss to reclaim market share lost by the new kid in town.

[peter02l]

Yes. Well said. I don't know why certain companies just don't give up and try to improve their core products. The $50 Zune discount turned out to be quite meaningless with the announcment of the new iPods. If these phone manufacturers try to play hardball, Apple can easily expand into low cost, touch screen phones without Internet capability.

[carleast]

I think it's just a simple application of clever business practice following the introduction of new models. The new iPod touch is seriously undercutting the iPhone. It's basically the same thing except for the phone part. So people could get the iPod Touch and a cell phone for much less than the iPhone. So they reduce the price of the iPhone significantly to keep demand levels up. I also think sales of the iPhone probably aren't going as well as first thought.

Thomas's prediction of the downfall of Nokia is so ridiculous it made me laugh. It's like saying Mercedes are going to topple Toyota's as the world biggest carmakers.

[Tom B]

You always have a contrarian take on things, Carl. No, i don't expect Nokia to disappear next week. But consider: they are a "pure play" in phones; all they have to fall back on now is racing toward the low end.

[mollytjm]

If you think the price cut means sales will slow, think again. I'm on a budget and cheered out loud when i saw the new iphone price because i intend to buy one now...i'm sure my cheer wasn't the only one out here. thank you, Apple!

[FaisalLaljee]

I never said price cut means sales will slow. I said sales are slow, hence the price cut.

[artman1033]

You are full of baloney. BY lowering the price, the new company in the industry, will destroy the high end competition. The whole telecomunication industry will be in turmoil. Aapl computers, ipods and iphones are all leading technologies. The introduction of the iphone in Europe in October will further the revolution. Go to an aapl store. The stores are always busy. Some are busy 24 hours a day. The whole aapl company is REVOLUTIONARY. Every product they make is the best of breed. Watch the Apple demos at their site and the meeting in San Francisco yesterday. aapl stock will hit $200.00 by Thanksgiving.

[FaisalLaljee]

Consider this - Apple has never dropped prices this drastically on any recent product. Macs and iPod's have held their prices despite competition from other PC makers and Sandisk and Creative's MP3 players. So why would they drop prices on the iPhone less than 3 months into the launch if they were selling really well?

As far as the stock price, the stock was up almost 70% this year as of yesterday. I recommended taking a little profit. At no point did I say to dump the stock completely.

I predicted that Apple would hit $200 by the end of this year 9 months ago. However, with the lower price of iPhone, there is short term weakness in the stock. Moreover, the mortgage and credit crunch will hit consumers sooner or later and that will curb discretionary spending. Please read the following posts to see how right I have been with Apple before you pass judgement.

stocksandblogs.com/200...

stocksandblogs.com/200...

stocksandblogs.com/200...

stocksandblogs.com/200...

[peter02l]

The reasons for dropping prices for the holiday season have been pointed out in other comments above. To rephrase, many people will be buying presents or choose to indulge themselves over the next three months. Some will purchse phones. All sorts of companies have a lineup of new products and/or price drops lined up to entice shoppers to spend their holiday gift budget on their products. A person could consider a phone, an exercise machine, a new guitar, etc. Because this is the biggest shopping season in the year, everyone expects to get a good deal to boot. The iPhone is certainly a coveted gift. The price drop makes it a good deal. So you can see how someone who might have been thinking of getting a new XM radio satellite system or a fancy watch might want to buy an iPhone instead. Now all these new iPhone owners will not be buying a Nokia or Samsung phone in the next couple of years.
As for the stock price, if you were predicting $200 by January, you should stick to it. All these rebates and the price drop will have a relatively small effect in the next four months because iPhone revenue is realized over 24 months. Say Apple will sell 3 million phones by the end of the year (to be overly optimistic) it will miss out on less than $30 million of revenue over two quarters. Believe me it has made much more in extra MacBook sales during the back to school season. The reason Apple is realizing iPhone revenue over 2 years is so that it can better amortize the component costs over the life of the product and alleviate the unpleasant cycle of bust and boom that follows the introduction of a new product.

[Roberto]

What a simplistic reasoning. And to advise people to sell based on that flimsy "logic"... You must really be a full-time analyst.

Why the 1/3 price cut is quite obvious, as other have mentioned: it's because of the new iPod Touch. What Apple has done it to ensure that people would still have a strong reason for buying the iPhone -- for the same price, they have a choice: get an iPod without the phone bit but with more storage space, or get an iPod with less storage but which you can use as a phone.

And by the way, if I were Nokia, I'd be trembling now. In one move Apple has suddenly made it incredibly difficult for me to sell my new N Series at with the (presumably) high profit margins I had been previously. Apple just moved the goalpost for high-end cellular phones, and if you're just a company that relies on phone sales, it's not a very pretty scenario that greets you this morning.

[FaisalLaljee]

So are you saying that a decline in consumer spending will not affect sales of the most expensive phone AT&T has to offer?

Also, have you seen the slow internet connection, the lame text messaging and picture mail function on iPhone?

Don't forget that the Blackberry Curve will compete directly with the iPhone, and it has faster internet and push email technology, which high-end consumers demand.

[topchat]

Far from being in trouble I'd say that in part the drop in price is to allow for a price position for a 3G new model of iPhone for the European/Far East market. I can see a $499 3G model coming along that could look very attractive in Europe.

[FaisalLaljee]

I didn't say they are in trouble. Just that they are not selling as many as they expected - hence the price drop. Name another apple product in recent memory that got such a big price cut less than 3 months after launching.

[jgphoto1]

The iPhone has already established a clear and strong sales record. This move should be taken at face value as an aggressive move to not just sell well but to blow the doors off the smartphone space. The competition who have been scrambling to come up with the "iPhone killer" at the assumed $600 price point just got totally blindsided.

You may be rightly concerned about consumer spending but with the new iPhone price combined with the new iPod line, iMacs, Leapord and revised price points you can bet that Apple stores with be more packed than usual and sales volume with be stratospheric for the next few months.

[NigelCheffers-Heard]

I think you are being overly simplistic here. Computers and music players are very different commodities competing in very different markets. The iPhone WAS expensive when it was launched, but the inertia it had ensured huge initial sales, and Apple correctly surmised the price was sustainable to the "must have" buyers. Now the frenzy has subsided, they have dropped to the "real" retail price. It certainly happens in the prosumer camera market, whose buyer profile I would suspect is somewhat similar to the iPhone. This is shrewd marketing, your assertions are irrational and unsupported by facts.

[Jon T]

Wrong. 1m by end September is just fine thank you.

This news is bad news as you say - for Nokia, Motorola, RIM, and Microsoft...

[Brian Croner]

I actually agreed with the article as I read it. I went through and read the comments, as well. The point about the slowing American consumer has already been made in several articles I've read over the weeks. The consumers have spent a lot of home equity to buy their stuff. They don't own houses. They live in houses the banks mostly own. My problem with the PS3 was it was too expensive. $600 for a video game system. They dropped it by $150 and still can't get sales. It's too close to the cost of monthly rent or mortgage. Same with iPhone. 4GB is skimpy, so 8 is necessary. And $600 is too expensive for a phone with a good interface. I got a LG VX9400 for $150, and free for a one year renewal. It has 320x240 and can play videos. It may not have a touch screen but it has a sideways-sliding widescreen. I'm not crazy about it but all it cost me was a one year renewal, and it is ready for high speed cell phone transmission, too.

The iPhone can only do something like 250kbps in practice. Decent 320x240 video with h264 and aac exceeds that, even at a mere 15 fps. Like with other cell phones and iPods, videos have to be pre-downloaded and transfered on to the internal storage for watching later on. So why pay $600? The audience is crazy about it, but how hard is it to get something somewhat competitive? 1/4 of the cost?

Rent is a lot to pay for a phone, and the consumer is losing buying power.

[DB]

iPhone clearly has problems. Cutting your price by 40% within 60 days says the price point was wrong and/or early judgments as to the performance of the phone are less than stellar. Doing so certainly irritates the early adopters. The fact that a 17 year old kid can hack the phone for use on any carrier will certainly irritate Cingular. For my own part, I think the biggest potential problem for the company is that this is the first time in the Jobs II era that Apple has stumbled so badly in the marketing of an "iconic" product. Who is going to wait in line for the next big thing when experience tells you to wait?

[Sadex]

This is so ridiculous. The problem with US markets is that they only focus on the short term so analysts like this one could not identify nor define the word strategy with three dictionaries on hand. Great companies are run with long term goals and not short term actions that are made to increase stock prices now so that some market insider can get rich quick. The current mortgage problem in this country is 100% the fault of short-sided (dumb) investors wanting more and more every single day so that district managers are forced to hand down unrealistic sales goals to front end employees and then s***thappens. That is not natural for any company so numbers have to be played with an adjusted and good decisions bypassed to reach unrealistic goals. Apple knows that the iPhone is a long-term thing and the most important thing right now is gaining market share. If they can afford to do this (based on their historical margins they can) it is a great idea. This "analyst" is one of the worst since his advice is to sell SOME of your Apple stock. Some? What kind of stupid advice is that. Basically its an "i Don't know what the heck will happen so be on the safe side". Gee thanks.

[FaisalLaljee]

Yes selling some of your stock is prudent if you are sitting on 70% gains since the start of this year. If you want to wait a year to make 30% more on this stock, with a short-term 15% downside risk, be my guest. You have been blinded by the love you have for Apple. As for blaming the mortgage crisis on the lenders 100%, I think you are dead wrong. Consumers are equally to blame. They refinance their homes and use the cash to buy silly toys like the iPhone, iPod and Plasma tv's. Thats ridiculous!

[jonreagan]

Faisal--this kind of panic reaction is misguided, and what you would expect from a first-time investor. I'm glad I didn't sell SLB or DO when you told us three weeks ago that oil stocks were done for the season.
Apple is a retailer, and the i-phone product launch is right out of Merchandising 101-102: launch a product at "the high", setting up your comp/reg price. Let it run for a while, make some ridiculously high margin, and then put the item on sale, creating new excitement and sales. It's all part of the product life cycle. Grant it, those life cycles are more compressed than they used to be, especially in tech.
The new price still represents healthy margin, and is the "real price" that Apple intended to be at all along. This is where they start to sell a huge number of units, and it's no accident that it's happening right at back-to-school/college... and well before Holiday.
There are very few accidents with a company like this, and Jobs is surely no dummy.

[FaisalLaljee]

I don't think you've ever read anything I write. Please show me where I told you to sell SLB or DO. The only oil stocks I recommended selling were the oil refiners back in July. In the month following my recommendation, refiners dropped anywhere from 15-20%. Based on your false allegation, I believe responding to the iPhone part of your comment is not necessary.

[User 105716]

The phone is a huge success, and I am not about to sell my stock because of the price drop of the Iphone. Apple still has plenty of other worthy products in its line.

That being said, I have not bought an Iphone yet. Why? Because that would require me to switch carriers and spend a great deal more on service (I'm on a family plan) and not to mention the $400 for the phone. Does the price drop tempt me to possibly switch in the near future? Yes. But right now I am in a contract, and It is not up until May 2008.

That's another thing about, you have to sign a two year contract for the phone at rates from $40-$100 a month. A huge jump from the $25 a month I pay now.

Overall, I think they are doing the right thing. I think the phone was overpriced to begin with. They need to come down. They also need more incentives to switch carriers. I'm not bailing on Apple stock yet, and I'm certainly not willing to switch carriers yet.

Apple continues to put out very exciting and innovative products every year (reason for price drop maybe?). I'm sure they will improve on the Iphone so I'm not ready to buy the phone yet, but they are sure going in the right direction to get me on board.

[FaisalLaljee]

I didn't say you should sell because of the price drop. I recommended taking some profits because of the consumer spending slowdown.

[peter02l]

Consumer spending will affect low end products more since as you know in more affluent areas there are not many mortgage problems. iPhone is a very small component of Apple's revenue and will be for many months. I can tell you Apple iMacs and MacBooks an MacBook Pros are selling extremely well - I hang around Apple stores for a living. There are certaily extreme daily fluctuations in Apple's stock price. However, unless you are suggesting selling at 10:00 am and buing back at 3:00 pm, it is a bad idea to miss out on gains that are sure to come in the next 4 to 8 months.

[East Coast]

The advice to sell some shares isn't ludicrous. No investment is ever a "sure thing" and to take some profits off the table, in a large cap stock which is up 60% YTD, in a market trying to get a handle on credit uncertainties is not stupid. The pricing change-up is odd for a company with such stable, on the mark pricing. If this is a strategic move, rather than a mis-step, or sale slowdown, why do it now after a large number of potential customers might have renewed their other cell-contracts, due to the high initial price? Why anger customers who bought the now non-existent 4gig, or spent up for the 8gig? Why do an about face, and potentially cause halo-effect customers to think "maybe they'll cut prices in this product, so I'll wait."

[KenC]

This analysis is sooooo basic. It shows a serious lack of understanding of Apple's business practices. Did you look at the price points of the newly released iPods? Did you see that the iPod touch is an iPhone without the cell service? Did you see the price on the iPod touch? Well, it's obvious that an iPhone is unattractive if it's priced $300 more than the comparably sized iPod touch.

Second, if you have followed Apple's approach to pricing of iPods in the past, you'd know that they tend to keep price points with new releases, and drop the prices on the older models that now seem less featured. Normally, the drop in price on the iPhone would come hand-in-hand with a new iPhone assuming the top price point. This didn't happen, because yesterday was iPod day, not iPhone day. In a month, you should expect to see the 16gig iPhone at the $499 price point. It's obvious, as the 16gig iPod touch is $100 more than the 8gig version. And, before the end of the year, you should expect a 3G version of the iPhone for either $499 for 8gigs or $599 for 16gigs. If Steve had released all the new iPhone models yesterday, then no one would have complained about the price drop on the old models, it was only the vacuum of news about new models that created the sense that iPhone sales must be slow. Without the context of Apple's past history, that might be the case, but knowing how Apple has released products in the past, should make it patently obvious that your contention about iPhone sales is absurd.

Of course, I bought 200 more shares at $134 today.

[FaisalLaljee]

You will be down 5-10% from here before you break-even again.

[mike hough]

As the writer of the first comment I am still awaiting how you reconcile the statement that iPhone is not selling when two independent surveys say it is above sales estimates and outselling ALL other smartphones. Your logic is at best prejudiced and at worst manipulative. I see that RIMM is upgraded todat. If I were to sell stock it would be RIMM who now have to compete with a $399 competitor which was already outselling them at $599!

For all Americans can I point out that the US is not the same as the world. Ponder this when talking about product margins:

iPod Touch price in US$

8 Gig: $299 in the US and $402 in the UK (similar in rest of EU)

16 Gig: $399 in US and $543 in the UK (similar in the rest of EU)

The EU by the way has a much bigger population then the US

The iPhone will have similar price comparisins.

If you need me to tell you what the extra margins are on these prices please let me know! You might like to build them into your model.

The US is a small component of the world. Just 4% at the last count.

[FaisalLaljee]

Guys - I have been a fan of the Apple stock since it was in the teens some 3 years ago. I predicted it could hit $200 before year's end. I am simply suggesting two things:

1) if you owned the stock at the beginning of this year, you are up 70%. Don't be a pig. Take some profits. The stock is down almost 10% from where I recommended selling it earlier this week.

2) Consumer slowdown will affect everyone. Not just the poor and the middle-class.

3) Apple's products are awesome. I own 3 ipods myself. For the first time this year, I actually considered buying a MacBook. However, all this has been priced into the stock and its run of 1000% these last 3 years. However, the iPhone is not its best work. I have used it. The text messaging and picture mail features suck. The email functionality is comparable to Palm's - way behind RIM. Finally the internet connection is slow - behind RIM and PALM. Now i don't like the Palm stock here, and RIM is over-extended as well.

4) The surveys saythat it is selling above estimates. Who's estimates are they considering? Some analysts were conservative when they projected sales of the iPhone while others were over-exhuberant. Steve Jobs is not one to apologize. But he made a mistake and he apologized. He priced it too high. If you want to turn a blind eye and find solace in surveys you read, thats fine by me. Estimates for the iPhone were over-exaggerated, and so was the stock price based on the iPhone. Now that they are issuing a rebate, and cutting down the price, the stock needs to come down a little. Own the stock for all I care. Mark my words though - it will hit $120 before it hits $150.

5) For the technicians out there, the stock formed a perfect double-top.

This is my last response on the subject. If you read my posts on my site, you will know that I have been right on AAPL consistently. Please don't let your love for the product or the compay fool you into owning the stock. If your time horizon is longer than 2 years, and you don't mind short-term losses, you can own it.

[Tom B]

I agree with you. I am not one to believe dubious "surveys", even if they say what I want to hear-- that the iPhone is a hit. What I DO believe is that two people on my block-- not "Apple fanboys" like me-- have iPhones ALREADY.

[FaisalLaljee]

How come you don't own one?

[User 105716]

I agree with Ken C, mike hough, and Thomas Barta. Right now is another perfect opportunity to buy Apple stock, it is only going up from here.

Of the three people I know with an Iphone, only one of them owns an apple computer, and I wouldn't consider him an "Apple fanboy".

[FaisalLaljee]

Do you own one?

[artman1033]

aapl just announced they sold their 1 millionth iphone yesterday. Looks like it will hit $150.00 before $120.00, Faisal. The entire basis of this report is now in question. Isuppli reports that they think aapl will sell 30 million iphones in 2011

[mike hough]

"Apple's (APPL) price cut on the iPhone means the phone is not selling the way they had hoped."

Oh dear me, can we have your apology now? Eight times faster than the iPod. An all BEFORE the price drop.

Apple iPhone Hits Million Mark

us.rd.yahoo.com/financ...;cm_cat=FREE&c...