Apple's iPhone price cuts leave mixed feelings

Some iPhone fans are delighted that it now costs $200 less, but others wonder if Apple needed to stimulate demand for the closely-watched device.

Tom Krazit Former Staff writer, CNET News
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Tom Krazit
5 min read
Apple's decision to slash the price of the iPhone was heartening, confusing and troubling to the company's many followers Wednesday.

Apple CEO Steve Jobs announced Wednesday at San Francisco's Moscone Center that the 8GB iPhone now costs $399, a $200 discount off the initial launch price for Apple's first mobile phone, released just 10 weeks ago. The news of a 33 percent drop in the iPhone's price was sandwiched between the unveiling of the new iPod Touch and a performance by British singer KT Tunstall, almost a throwaway piece of the keynote speech on a day that saw Apple unveil new iPods in every category it occupies.

"We want to get even more aggressive than this," Jobs said, as he displayed the wide range of iPods that will be available this holiday season. The iPhone price cut certainly was aggressive, and could perhaps convince some who were sitting on the sidelines to jump on board with Apple. However, it does raise the question of whether Apple needed to stimulate demand for perhaps the most hyped gadget in history by reducing the price so drastically so soon after its release.

In fairness, iPhone demand seems relatively strong. On Wednesday, Jobs renewed Apple's pledge that it will have sold 1 million iPhones by the time the current fiscal quarter ends later this month, and also noted that the customer satisfaction reports Apple has seen rated the iPhone higher than any product Apple has ever shipped. And the iPhone was the best-selling handset among smart phones and feature phones sold to U.S. consumers in July, the first full month it was on sale, according to iSuppli.

But iSuppli estimated that only 220,000 iPhones were sold during the entire month of July. Apple reported selling 270,000 iPhones in just the first 30 hours the device was on sale in June.

Of course, there's always going to be an initial drop-off in sales of a product with as much prelaunch buzz as the iPhone, but a price cut that steep coming so soon after the first iPhone hit the streets is making some analysts raise their eyebrows.

Apple did not immediately respond to a request for comment on why the company chose to make the pricing move, but Jobs put a holiday spin in the price cut.

"We want to make iPhone even more affordable for even more people this holiday season...We want to put iPhones in a lot of stockings this holiday season," Jobs said.

Roger Kay, president of Endpoint Technologies Associates, wasn't so sure Apple's primary goal was to make the holiday shopping experience a little lighter on the wallet.

"It is a very interesting sign. My first suspicion is that they aren't getting the volume," Kay said.

One source of confusion surrounding the iPhone and its sales could lie in how the numbers are calculated. Apple can count iPhones shipped to AT&T stores as sales, even before they have made their way into consumers' hands. Estimates vary depending on what point in the process the tally is made. Earlier this summer, AT&T revealed that it activated far fewer iPhones than were sold by Apple, and one of the reasons given for that gap was that a large number of iPhones may have been in transit as the quarter closed on the night of June 30.

iSuppli obtained its estimates by surveying 2 million U.S. customers and asking them whether they bought an iPhone. The market research firm actually thinks Apple is going to sell 4.5 million iPhones this year, a far greater figure than other estimates indicate.

Piper Jaffray's Gene Munster issued a research note on Tuesday, before the news of the price cut, estimating that Apple is on pace to sell about 800,000 iPhones during the quarter. Piper Jaffray reached its estimates by counting sales in Apple stores around the country and cross-referencing its data with data from PJC Wireless, which watched iPhone sales at AT&T stores.

After the news of the price cut, Munster said Apple is trying to accelerate demand among mainstream consumers who couldn't afford a $599 iPhone, and who will now snap up the device in greater numbers.

"Before the price cut, we had expected the iPhone to be mainstream by the end of (Apple's 2009 fiscal year, which will end in September of 2009); we now anticipate a steeper adoption curve earlier. The bottom line: Apple is investing iPhone profit dollars over the next few quarters in order to be a legitimate player in the phone market," Munster wrote Wednesday after Apple's announcements.

The price cut will come at a cost to Apple's overall profits. Piper Jaffray now estimates that Apple's gross margins could fall to as much as 27 percent in a worst case scenario, four percentage points off their current estimate for this current fiscal year. That might have been what Apple investors were worried about as they bailed out of the stock Wednesday following the announcement. Apple's stock started going down at around 10 a.m. PDT in the classic "sell on the news" strategy, but fell precipitously after news of the iPhone price cut surfaced, to close down 5 percent. Still, the stock was worth more at the end of Wednesday than it was last Wednesday.

It could also come at a cost to Apple's reputation among its most dedicated fans, who were dismayed to learn they paid $200 more for their iPhones not too long ago than someone who entered an Apple store today.

C'est la vie, said Stephen Baker of the NPD Group. "If you didn't think it was going to drop in price, you were dreaming," he said. Under Apple's returns policy, iPhone customers who made their purchases within the last 10 days can get $200 back, so long as they contact Apple within 14 business days of when their iPhone first shipped.

It's not at all clear from looking at the estimates of iPhone shipments whether the price cuts were needed to stimulate demand. Piper Jaffray's checks of Apple stores estimated that Apple sold several more iPhones per store in August during the height of the back-to-school selling season than it did in July.

But it's likely that the price cuts will stimulate demand, regardless of whether Apple was motivated by the need to jumpstart sales or the desire to reach out beyond its core group of early adopters.

CNET News.com's Michael Kanellos contributed to this report.