Apple to iPhone Customers: “Mea Culpa”
With Apple in the headlines all week from its iPhone pricing debacle, I’ve kept a close eye on the company’s stock price.
One rule of thumb on Wall Street is that if your company find itself in the news for negative reasons, take control of the issue and engineer some new headlines, preferably the kind that will minimize any damage to the company’s stock price.
That’s what Apple tried to do when it’s new iPhone price-cutting strategy blew up in its face. Price-cutting is a real departure for Apple. The company is famous for eschewing big sales and dramatic cuts in product prices. It sells quality – and if that quality includes price tags that induce stocker shock, so be it.
So a lot of eyebrows were raised on Wall Street when Apple went against the grain and cut its price or its new iPhone from $599 to $399. Even at $399, the iPhone is vastly more expensive than any other cell phone out on the market, so a good argument can be made that Apple isn’t really leaving all that much money on the table. The lower price should attract a lot more buyers than it would at $599. American consumers, after all, are famous for letting the early adopters pay the full freight, shake out any product bugs, then waltz in a few months later and buy in at a lower price tag.
But Apple didn’t count on how those early adopter would react when it slashed prices only two months into the iPhone’s release. Apple adopters had counted on the fact that the company would not cut prices for the iPhone. As I said, it has a long history of not doing so with its computer products.
Even Steve Jobs wasn’t giving off any vibes that Apple would lower the iPhone price. In a classic exchange with a reporter from USA Today, Jobs had the following to say:
“Soon after Apple (AAPL) announced an unexpected $200 drop in the price of the iPhone on Sept. 5, Chief Executive Steve Jobs betrayed little sympathy for the chumps who had bought the device at the higher price. "Well, that's what happens in technology," he said.”
A rugby scrum ensued after the about face, with Jobs taking the brunt of it. Customers, media mavens, bloggers and Wall Street analysts all piled on Apple and its CEO.
"A drop of $200 after just 66 days means that the iPhone decreased roughly $3.03 a day in retail value between launch and yesterday's announcement," said Terrence Russell on Wired's blog, Epicenter. "It's no secret that electronics drop in price over time, but such a deep and hasty discount makes trying to quantify the realistic retail value of the hardware confusing."
"To us, this move suggests the phone is not selling as well as Apple had hoped," wrote Dan Frommer on Silicon Valley Insider. Meanwhile Apple 2.0's Philip Elmer-Dewitt predicted that the company may be "clearing out inventory to make way for a 3G iPhone ASAP," referring to future product that might utilize a higher-capacity phone network.
Customers were particularly ticked off. In comment threads on The Unofficial Apple Weblog, posts from disgruntled iPhone owners numbered in the hundreds. "A $200 penalty for buying into their vision and trusting them?" asks a commenter going by the name Billy K. "Never again."
Now comes news from Apple that it will appease early iPhone adopters by offering them a $100 gift voucher, good at any Apple store or on Apple.com. Will that appease customers? Probably. Most Apple customers are loyal to a fault.
Will it stem the sharp decline in Apple stock from the past week? That’s not so clear. Apple stock fell from $145 per share to $130 in about 48 hours after the pricing announcement. It’s creeping up somewhat through Friday trading but the damage has been done.
After all, what is more deliciously ironic than using your $599 iPhone to email your broker to sell your Apple stock?
(Here is Apple CEO Steve Jobs’ open letter to iPhone customers this week)
To all iPhone customers:
I have received hundreds of e-mails from iPhone customers who are upset about Apple dropping the price of iPhone by $200 two months after it went on sale. After reading every one of these e-mails, I have some observations and conclusions.
First, I am sure that we are making the correct decision to lower the price of the 8GB iPhone from $599 to $399, and that now is the right time to do it. iPhone is a breakthrough product, and we have the chance to "go for it" this holiday season. iPhone is so far ahead of the competition, and now it will be affordable by even more customers. It benefits both Apple and every iPhone user to get as many new customers as possible in the iPhone "tent." We strongly believe the $399 price will help us do just that this holiday season.
Second, being in technology for 30-plus years I can attest to the fact that the technology road is bumpy. There is always change and improvement, and there is always someone who bought a product before a particular cutoff date and misses the new price or the new operating system or the new whatever. This is life in the technology lane. If you always wait for the next price cut or to buy the new improved model, you'll never buy any technology product because there is always something better and less expensive on the horizon. The good news is that if you buy products from companies that support them well, like Apple tries to do, you will receive years of useful and satisfying service from them even as newer models are introduced.
Third, even though we are making the right decision to lower the price of iPhone, and even though the technology road is bumpy, we need to do a better job taking care of our early iPhone customers as we aggressively go after new ones with a lower price. Our early customers trusted us, and we must live up to that trust with our actions in moments like these.
Therefore, we have decided to offer every iPhone customer who purchased an iPhone from either Apple or AT&T, and who is not receiving a rebate or any other consideration, a $100 store credit toward the purchase of any product at an Apple Retail Store or the Apple Online Store. Details are still being worked out and will be posted on Apple's Web site next week. Stay tuned.
We want to do the right thing for our valued iPhone customers. We apologize for disappointing some of you, and we are doing our best to live up to your high expectations of Apple.