Apple's iPhone Price Cut: An Unfair Blow to Shareholders

Only Steve Jobs and the decision makers at Apple (AAPL) know the real reasons behind doing away with the 4 Gb version of the iPhone and slashing the high end version by $200. But to consumers like me and you, this sure is a big letdown, and has double impact on me since I am long AAPL.

Price cuts on consumer gadgets are not unusual. The iPod video, which I bought for $300 in 2005 and which had 30 Gb capacity, now sells for $300 for a 160 Gb hard drive. But its been more than 2 years since the iPod video came out, and the price difference you pay is the premium for being one of the very few who owned the product in the beginning. Infact its the same with any product. Cars, computers, TVs and the like. There's always a premium you have to pay for owning something when its a fashion. And we're willing to pay that.

But if Apple is telling me that I paid $200 extra for trusting them and buying the iPhone 10 days before their shocking price cut, I am not buying their sales pitch. I was a huge fan of Apple produtcs and will continue to admire their innovation, but I think Apple has gotten it woefully wrong here.

I do not expect Steve Jobs to come out with the real reason behind cutting prices, but I have a hunch the phone's not really selling great. I say this because the reason Steve Jobs gave is that he wants the phone to fill more stockings this year. Thats totally unjustified. And he realized this just 2 months after the roduct release? Why didnt he think of it earlier?

Also, when the iPods were first released, they were ridiculously expensive for the masses, yet Jobs and Apple took their own sweet time to cut prices, and did so only reluctantly.

I think this negative publicity for iPhone is definitely a dampener for Apple. I, for sure will be doubly wary of buying an Apple product from now on, because they just do not seem to have any regard for their most fanatic customers, who swear by every product of Apple.

I am also uncertain about the impact this will have on iPhone sales. I doubt that a $100 price cut will really lure anyone on the fence about the iPhone into buying one. I am of the impression that people who really want an iPhone badly do not care for the $100 price difference, and would have bought it anyway, like a million people have already.

By the way you're eligible for a refund of $200 if you bought the iPhone within 14 days. So rush to the Apple Store and get your money back. Again, I am sure this price cut and refunds will only add to Apple's woes and will cut their EPS for next quarter by at least 10 cents, as Goldman Sachs indicated today.

After all the murkiness is cleared, we'll know more about this price cut and the factors that influenced it, but for now, I am off to the Apple store to get my refund.

Disclosure: Author has a long position in AAPL

Comments

[abc:]

[And he realized this just 2 months after the roduct release?]

This product and price was announced in Jan, 07 correct? So you are 9 months into it.

Ever heard of economics of Volumes...

Plus, when u go to a manufacturer asking for 1 million phones production cost the price is say X per unit, and next 5 million is 0.5 X.

On day 1, u don't even know if it will be a hit or miss, so u order just half a million and another half in 4 weeks probably even agreeing to pay 1.2 X.

And in their last qtr results they clearly said the product positioning is gonna take place, it is all planned I can tell you.

Wake up Prashant...

2007 Sep 07 08:10 AM

[macmatthews:]

Just for the sake of accuracy, the iPhone is now $200 cheaper, and I think this reduction will definitely lure many wavering customers. The refund is $100, not $200. i think the real issue is whether the iPod touch will dilute iPhone sales.

2007 Sep 07 09:55 AM

[peter02l:]

Why the misleading title? You said nothing about how this affects shareholders. You gripe is as a customer. Besides, since you are getting the $200 difference back, you have nothing to complain about.
This really is about envy, isn't it? You were perfectly happy to pay $600 for your phone (even though you are getting $200 back) but you just can't stand someone else paying $400 for it. In case you forgot the first couple of days of release, some folk were even willing to pay $800 or more it. Some were even willing to pay extra to turn it into an iPod touch!

2007 Sep 07 11:22 AM

[Prashanth C...:]

hi Peter
thanks for the comment. I submitted this on seekingalpha with the title "Apple's iPhone price cut: shocking and unreasonable".
I think SA changed it to unfair blow to shareholders, thats why the misleading title.

2007 Sep 10 06:16 PM

[StreetSweeper:]

Apple, worth over 100 billion dollars can afford, and has, a genius marketing strategist at its helm--thinking way ahead. I have no doubt that before the iPhone release everything was laid out as a possible strategem based upon the sales growth. "If we sell this amount, we do this...", etc. Jobs announcing a $100 give-back to buyers was brilliant. If he had announced it on Wednesday, the previous buyers would have cried for $200 cash! By delaying it a day he comes on as a real "hero" to faithful Apple fans and gets the returning $100 sales to Apple. Lowering the cost $200 makes the iPhone seem on "sale" for the holidays, establishes it as a strong competitor to existing vendors, and will probably put Motorola out of business within a year if they cannot come up with something spectacular under their new management. (Too late, IMHO!) Apple is now the technological leader of the handhelds and will likely be the leader in market share within two years. (They are now the fastest selling.)

Just wait until the next two quarterly reports come out. Apple stock will amaze...no, stupify, the entire market. They have maintained huge growths in all of their sectors from iTune sales, Mac sales, iPod sales, (not to mention the soon-to-be released OS) and they more than likely are working on 2 million units in sales of the iPhone. And the icing on the cake is that all of the iPhone sales are figured in over a two year prorated period. So if sales were to drop due to economic factors, such as the current credit crunch or pending recession, their mix of prorated and realized profits should bridge the gap until things get back to normal. Clever!

Ah, if only Jobs could somehow run our government's budgetary goals!

2007 Sep 07 04:25 PM

[shawnb:]

It took 2 years for the iPod to sell 1m, versus 74 days for the iPhone. So why is it so surprising that the iPod price cuts took longer?

I agree that the iPhone has probably gotten cheaper for Apple to produce due to the higher volume. I also agree that Apple is probably slashing the price to drive sales into the holiday season. This makes sense to me. There is currently no competition to the iPhone. Like the iPod, there probably will never be a true competitor, but it still makes sense for Apple to capitalize on all the recent iPhone hype and get it in as many hands as possible while they can. This will likely yield “Apple converts” who will grow to appreciate the stability, simplicity, and pure functionality of Apple products. That may or may not translate into Mac sales, but considering that most people buy a new phone every 2 years, it will lead to repeat iPhone customers in the future. If Apple can do this while sustaining healthy margins, what is the damage to shareholders?

Also, I believe Apple cut the price because an improved iPhone (3G and more memory?) is in the pipe and will follow some time after the holiday season. So why not cut the price and sell as many as you can now? I also wouldn’t be surprised if the current iPhone drops another $200 within 6 months and becomes the “low end” model when ver 2.0 comes out.

I think the outrage over the price drop is amusing. The “early adapters” who would have stood in line (but didn’t have to thanks to Apple’s competent product launch management) were happy to pay the initial iPhone price, and for the past couple months have been proudly showing off their shiny new toy to everyone who will look at it. Now they feel like idiotic Apple tools because they overpaid for that pleasure and it didn’t last nearly as long as they would have liked. They didn’t get milked; they got what they paid for, getting the first stab at the latest technology. In all the media hype I saw, no one ever said the iPhone was cheap. I applaud Apple for dropping prices when they could do so, instead of milking additional customers for the sake of early adapters’ egos.

As far as alienating Apple’s “fanatic customers”, where are they going to go? I don’t see them migrating to Vista and WM 6.0 anytime soon. In fact, I think the fact that they got their toes stepped on is a positive sign. Personally, my main beef with Apple is that their products historically have not been competitively priced. There is an Apple sub-economy entirely to itself where two- and three-generation old products sell on eBay at ridiculously small discounts to the retail prices of new (and much better) products. I think it’s safe to assume that this little Apple bubble is going to burst as Apple moves from an “exclusive club” to a mainstream product. It may not be good for the egos of long-time die-hard Apple fans, but it is good for Apple and consumers in general.

Apple owners: welcome to technology reality, where early adapters pay hefty premiums and the overall value of your products fall exponentially over time to the point where you eventually have to pay someone to take it and dispose of it properly. It’s a sad reality, but maybe that means you finally “made it” to the big stage. Or does being on the big stage take some of the fun out of owning something Apple?

I find Apple’s price cut refreshing. I hope it’s a sign that Apple will be innovators of both technology and value in the cell phone industry, which desperately needs both. Personally, I bought a MotoQ when it first came out in April of last year. I paid $200 for it, and got locked into a 2-year $100/mo contract (450 voice min, unlimited data, and some free texts). It looked cool, but my initial underwhelment due to the anemic software has grown to outright frustration due to the constant glitches and annoyingly unintuitive interface. In the end, I will pay $2600 for this “learning experience”. The Apple fanatics are disillusioned and crying foul over 200?! Go ahead and put your money where your mouth is, and jump ship. There are plenty of people like me willing to take your spot, especially if the iPhone evolves from being media-centric to information-centric (i.e. Exchange support). Besides, you’ll be back.

2007 Sep 12 08:13 AM