On June 29th, 2007, Apple (AAPL) launched the first iPhone. In five years, since that ground-breaking launch; Apple has garnered an astonishing 75% share of global smartphone profits. Clearly, it must have done something right. By positioning itself as a premium device maker, with excellent customer service, it has deservedly gained a very loyal following.
This following however has expectations. Just 2 weeks ago on September 14th Gene Munster of Piper Jafray stated the iPhone 5 was like a "Rolex." Comments such as these are not unusual, and Apple itself encourages them through flowery prose alluding to it being like a "finely crafted watch."
This is excellent marketing, but it needs to be backed up with product quality. As many quality practitioners may know, the basics of quality are about "conformance to specification."
Of course, this limited definition doesn't really capture exactly what quality is about as most consumers do not care about quantitative specifications. Most do not care for instance to know about components. So really, this definition should perhaps be better expressed as meeting a perceived level of quality expectation, a qualitative test. And for Apple, it is all of the consumer connotations of what a premium device should look like (gorgeous); behave (fast processing); and be treated as an object worthy of respect by your peers (a difficult test, but an important one that designers must engage in).
Apple has failed in this quest for a premium device in the iPhone 5. After intensively studying its performance in the real world, I can categorically say the opposite of Apple's marketing; this is not the best iPhone yet. It is the worst. This is an order of magnitude different to any previous iPhone quality issue.
With initial quality problems being reported in the iPhone 5, with the huge goodwill engendered by previous launches, it was easy to give them the benefit of the doubt and assume these were isolated cases of quality control not being met. As if the product itself was premium, but a fault happened somewhere in the inspection process. This is not the case. There was a failure in Quality Assurance - simply put, these faults are design flaws a premium device should not have. Below is a list of the key flaws discovered so far with estimated magnitude of impact.
Magnitude of Impact
Apple's foray into mapping has got off to a poor start with its introduction in iOS 6, an integral feature of the iPhone 5. With massive errors in data verification, it could take years to be a worthy competitor to Google (GOOG) Maps. However it does introduce turn-by-turn navigation for the first time in iOS, a feature many suspect Google refused to provide.
Large - This problem is especially acute outside of North America. With iOS 6 in general being a relatively robust update, the overall drop in satisfaction levels may well be due to this issue alone.
Many users are reporting scuffing on the black iPhone 5 visible upon unboxing. They are also reporting it scuffs easily with damage often being reported when it makes contact with any other hard surface.
Medium (will grow to large over next 2 years if unresolved) - with over 45% of a large sample reporting issues, this is clearly not an isolated issue. It also badly affects the perception of a premium phone. With 80 million people per quarter passing through Apple stores, one wonders how these scuffed up phones will influence consumer purchasing decisions.
It appears there is a systemic flaw resulting in over 90% of iPhone 5s, under the right conditions, having purple glare in photos. For proof of this, follow the instructions here to see if it can be replicated.
Medium - It is possible this is a software flaw and will be resolved, nevertheless once people start putting iPhone pictures up on Facebook (FB) and other social media sites with the tag 'sent from an iPhone', this will not reflect favorably on Apple.
Some users are reporting their phone rattles.
Low - This appears most likely to be purely a quality control issue, however iPhone returns do not help Apple's bottom line.
This is the most astonishing for what it implies about quality. Many users are reporting alight leak
Low - This does not appear to be widespread, however it is highly surprising that Apple could produce a product which has this. The quality tolerance on this should not be more than 1 in 100,000, it appears to be considerably more than that.
Minor - These tend to crop up with every launch and again are most probably a quality control issue which are unlikely to affect purchasing decisions.
So what does this mean for someone interested in the AAPL share price and wants to stay ahead of the market? Well, this will impact in two ways. Firstly, a higher rate of phone returns: if average repair costs are a conservative $200 and there is a 10% increase in rate of returns over the long term average, that will cost Apple circa $3.5 billion. This might be a hidden reason for iPhone shortages in some stores with some people needing multiple replacements (read comments). The second reason, a lower sales projection - now that will significantly hit Apple. If we lower CY13 forecasts by 10%, a conservative figure, 17 million fewer iPhones sold, with $500 profit per phone; that will hit Apple to the tune of $8.5 billion.
$12 billion in lost profits for mistakes Apple should never have made? Now that is significant.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.