Apple's iPhone 4 antenna flap: Overblown, hubris or simple testing mistake?

The iPhone 4 antenna issue becoming a major headache for Apple, but larger questions remain. Is Apple too cocky, handling a skirmish with Consumer Reports well or in denial about overlooking a design flaw in its testing?
Written by Larry Dignan, Contributor

With the iPhone 4 antenna issue becoming a major headache for Apple, analysts are busy handicapping the costs of a potential recall, which observers like Piper Jaffray analyst Gene Munster deem "highly unlikely." But the larger questions are whether Apple is too cocky for its own good or handling a skirmish with Consumer Reports properly since the antenna flap may be overblown.

In recent days, it has been an interesting duel between Consumer Reports and Apple. Apple has admitted that there is an antenna reception problem on its iPhone 4, but told customers that the fix is to hold the phone the right way---when you touch the antenna,
reception dies. Consumer Reports and other testers have documented signal degradation when touching the lower left portion of the device, bridging the iPhone’s antennas. A bumper case (right) fixes the problem. Update: Apple is holding a press conference Friday most likely to address the iPhone 4 issues.

Consumer Reports verified that there's a hardware issue and has called on Apple to fix the iPhone 4. Duct tape seems to help.

Simply put, Consumer Reports says "we think it's the company's responsibility to provide the fix—at no extra cost to consumers." Typically, Consumer Reports' recommendations are gold and companies don't mess with the publication's findings. In most cases, product companies respond to the concerns in an open and public fashion. Every once in a while Consumer Reports is off, but its track record is solid.

Apple hasn't given much of a response. After all, it's still moving a lot of iPhone 4s. Macquarie analyst Phil Cusick says in a research note:

While we do not see any evidence of a slowdown in sales and our checks indicate almost no returns, the antenna issue could become a public relations problem and potentially impact Apple’s sterling brand image.

In the meantime, analysts have been handicapping the costs of a recall or providing a bumper case free of charge. Bottom line is that the expense is negligible. To wit:

  • Piper Jaffray's Munster says Apple could give away bumper cases that it sells for $29. Giving away a case for free at $5 each would run about $178.5 million for every iPhone 4 over the next year. That equates to 1 percent of operating income.
  • According to CNet News, Bernstein Research analyst Toni Sacconaghi pegs a recall at $1.5 billion. Like Munster, Sacconaghi says that a recall isn't likely.
  • The cheapest option for Apple is to do nothing. Munster explains:

A second is option is for Apple to do nothing; as we've mentioned, we estimate that only 25% of iPhone users are periodically affected by the issue, and Apple could weather the storm by letting the current demand for the iPhone speak for itself.

Delivering bumper cases would be the easiest option. Apple could keep customers and Consumer Reports, which accounts for a lot of word-of-mouth marketing, happy. The issue here is that Apple would have to admit there's a real design problem with the iPhone 4.

That brings us to the hubris issue. Sacconaghi says that Apple's limited disclosure about Steve Jobs health, the attack on Adobe's Flash and skirmish with Gizmodo over a lost iPhone add up over time. Meanwhile, Apple's argument that customers need to hold the iPhone 4 a different way doesn't go over well.

Munster isn't so sure. He thinks the iPhone 4 flap is overblown. In fact, Apple probably just made a testing mistake. Munster notes:

We believe Apple field tests every iPhone model. However, recall that the lost iPhone 4 prototype was disguised as an older model iPhone with a case. Given its proclivity to secrecy, it is possible that Apple required all test units to have a case, which would render the issue undetectable. In other words, Apple may never have known the problem existed on test units in the field because they all had cases on them.

At this juncture, there are good arguments to be made for all sides. Apple can be too cocky. The iPhone 4 flap could very well be overblown. But it's clear that Apple needs to do something. Risking a brand over what could be fixed with a case doesn't make a lot of sense.


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