Apple iPhone 4 Recall Would Cost Billions, Say Analysts

With Apple’s (AAPL) iPhone 4 antenna problem getting so much attention, especially after Consumer Reports said it would not be recommending the device, analysts began to assess the impact on Apple.

Apple said that adding a 'bumper' to the iPhone 4 could help improve signal strength by protecting the antenna. Photo: Apple

With Apple’s iPhone 4 antenna problem getting so much attention, especially after Consumer Reports said it would not be recommending the device, experts warn it could cost Apple billions of dollars. If Apple were to bow to pressure and issue a recall for the iPhone 4, the move would cost the company an estimated $1.5 billion, according to a senior analyst.

Apple has been heavily criticised for signal problems on its latest iPhone. Users have reported dropped calls and weakened reception when their hand covers the lower left-hand corner of the device.

Apple has acknowledged that holding the phone in that way can cause signal issues, but said this was common with many handsets. A forthcoming software update will fix problems with the phone displaying an incorrect number of signal ‘bars’ but it will not resolve this issue.

Paddy Power Plc, Ireland’s biggest bookmaker, said the chances that Apple will ultimately recall the phone have increased following what it described a “betting frenzy” after the Consumer Reports review. The consumer organization said on July 12 it wouldn’t recommend the phone because of its tendency to lose signal strength when held in a certain way.

“If the current betting trends are to be believed, it now seems certain that a recall is in the cards,” Paddy Power said in a press release. Natalie Kerris, an Apple spokeswoman, didn’t immediately return messages left outside of business hours.

Paddy Power first offered odds of 2-to-1 against a recall, meaning a bet on a recall would pay $2 plus the initial $1 if such an event occurred. Now those odds are 4-to-6, meaning a winning bet of $1 would pay $1.66 if a recall were to occur.

Consumer Reports said it wouldn’t recommend the latest iPhone until the signal problem is fixed, though the device otherwise received high ratings. The test results showed that when a user covers the phone’s lower-left side, where two parts of the antenna meet, the loss of signal strength may lead to dropped calls in areas where AT&T Inc.’s coverage is weak, Consumer Reports said.

Toni Sacconaghi, an analyst at Sanford Bernstein & Co. in New York, said that although a full product recall was “highly unlikely”, such a move would cost Apple $1.5 billion. The more likely option would be for Apple to issue every iPhone 4 owner with a rubber “bumper.”

The “bumper” will fit over the stainless steel antenna band that runs around the device, and will help to reduce these signal problems. The bumpers, which come in a variety of colours, cost £25, but Bernstein estimates that giving them away to customers would cost Apple $1 per unit.

“It could be done immediately, would directly address the Consumer Report’s concern, and would be financially immaterial,” he said. “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.”

Sacconaghi said this latest episode showed Apple was engaging in a worrying pattern of “hubris” and had, on occasion, seemingly purposely mislead customers and investors.

“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.

“Examples of its behaviour have included its limited disclosure practices, 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 characterisations 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 saw more than £6.5 billion wiped off its value yesterday, following the publication of the Consumer Reports review. The company’s share price fell by 4.2 per cent at one stage, although it rallied later in the day and recovered slightly at the US stock markets headed higher. [via Daily Telegraph (UK) and Daily Finance]

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