iPhone 4 Recall Would Cost $1.5 Billion

Posted on July 14, 2010

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In  lieu of Apple’s iPhone 4 launch in late June, many people have been noticing problems with the antenna. Holding the device the wrong way can cause a drastic loss of signal strength, even where other phones would get normal signal strength. After Apple’s letter to consumers stating that it was merely a software glitch, people were outraged at Apple’s lack of action. Many demanded a recall.

Although a recall would be damaging to Apple’s solid reputation, that wouldn’t be the only issue standing in the company’s way. According to some calculations made by Bernstein Research analyst Toni Sacconaghi, it would also be a costly endeavor. Sacconaghi estimated that while “a full product recall of the iPhone 4 (is) highly unlikely,” it would cost Apple $1.5 billion, which is about 3.5% of it’s total $47.50 billion assets.

What would be more cost effective for Apple would simply be to provide a free bumper (case that prevents contact with the hand and device) to every iPhone 4 user. It is estimated that this would only cost Apple $1 per device, or $1.7 million in total. Doing this would yield 882% savings over a recall.

“It could be done immediately, would directly address the Consumer Report’s concern, and would be financially immaterial,” Sacconaghi wrote. “While it would force Apple to ‘acknowledge’ a design issue with the iPhone, we believe that consumers are increasingly aware of the antenna issue, and remedying it rather than dismissing or ignoring it appears most appropriate.”

“Perhaps the bigger, longer-term concern for Apple investors is the emerging pattern of hubris that the company has displayed, which has increasingly pitted competitors (and regulators) against the company, and risks alienating customers over time,” Sacconaghi wrote. “Examples of its behavior have included its limited disclosure practices (Steve Jobs’ health; plans for deploying its cash balance), its attack on Adobe’s Flash, its investigation into its lost iPhone prototype (which culminated in a reporter’s home being searched while he was away and computers being removed), its restrictions on app development, and its ostensibly dismissive characterizations of the iPhone’s antenna issues (i.e., phone needs to be held a different way; a software issue that affects the number of bars displayed). The worry is that collectively, these issues may, over time, begin to impact consumers’ perceptions of Apple, undermining its enormous prevailing commercial success.”

Apple stockholders might want to pay close attention to this issue over the coming months.

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