Friday, September 14, 2007

All iPologies

Mea culpa, mea maxima culpa: That's the old-school way of saying you screwed up big time. It's an admission we don't hear very often from the good folks at Apple Inc., but we're hearing it now in the wake of uprising from many people who bought the iPhone after its recent introduction. Embodied – no, embedded – in that apology is a classic example of how a company can take with one hand, and then ... take with the other.

Turns out that Apple CEO and technology high priest Steve Jobs has been inundated with "hundreds" of e-mails from irate customers, people who bought the popular 8GB iPhone configuration at the original asking price of $599. The early adopters, the canaries in the gold mine of high technology, lined up and bought the phone in record numbers. Now many of them have let Jobs have it after Apple announced (Sept. 6) a price reduction of the phone's most popular version – lowering the price by $200.

Jobs clearly felt the heat – felt it enough to write an open letter posted on the Apple Web site:

"I have received hundreds of emails from iPhone customers who are upset about Apple dropping the price of iPhone by $200 two months after it went on sale," Jobs wrote.

Jobs went on to defend the price cut: "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."

But hoping to placate the angry burghers of MacWorld, Jobs decided to make amends, to do the right thing. Kind of. "[W]e 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 towards the purchase of any product at an Apple Retail Store or the Apple Online Store," Jobs wrote. The fine print on that sweetener: Anyone who bought the iPhone up to two weeks before the price cut could opt for a $200 cash refund.

Hurrah! Score one for the customers! At least that's the first-blush response. But digging a little deeper shows that what looks like a consumerist victory or a corporate defeat is really anything but.

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Consider some other factors:

Apple's decision to make restitution to some early adopters is expected to result in a one-time $100 million charge to Apple, according to a UBS analyst interviewed by ZDNet. Wall Street generally doesn't include one-time charges in its computation of profit and loss, so Apple probably won't suffer any impact to its earnings per share, or to its stock price (lately going through the roof, most recently in the $140-a-share range). The gesture costs them, in practical terms, almost nothing.

Those customers who overpaid for their 8GB phones between June 29, when the phones rolled out, and the last week of August, two weeks before the price cuts took effect, are stuck with just the $100 benefit – only half of what they were overcharged. That's likely to be the majority of Apple's most faithful, most reliable customers.

Now add the kicker: That $100 takes the form of a credit that can only be used at Apple online and bricks-and-mortar stores. It doesn't return money to customers' pockets, like an outright rebate check would. It only gives customers a chance to spend even more money at Apple stores. The actual overpricing isn't really resolved to customers' satisfaction; the initial overcharge for the product is followed by Jobs' fairly bloodless iPology and an opportunity to come back to Apple to spend that fraction of what they were overcharged in the first place.

As anyone who's ever shopped in an Apple store knows, there's not a hell of a lot you can buy there for $100 or less – if you own Apple products, what's available at that price (iPod cases, iPhone protectors, portable speakers, quality headphones) is probably something you've got already.

Which means that if this $100 AppleScrip is to have any value at all, the early iPhone buyer will almost certainly have to spend more than the $100 to get something else they really want. You might, say, buy an external hard drive for your iMac computer for $125. You'll walk out of the store with a great discount on that hard drive, but the $100 credit Apple gave you will safely be right back where it started: in Apple's bank account.

Early buyers of the 4GB version of the iPhone have been embarrassed too; Apple has announced that the 4GB model is being phased out in favor of the more popular 8GB form. (Planned obsolescence used to take a little longer than two months to take place.)

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In the short run, it's nothing less than a win-win for Apple – the company gets to look magnaminous, contrite and responsive to customer concerns – and a lose-lose for many customers, who, having overpaid for their iPhones, now have to contend with going back to Apple to buy something else, armed with a "credit" of only half of what they overpaid.

But longer term, it's also a cultural faux pas for Apple. The company's finally been caught doing blatantly what it's been doing quietly for years: testing the patience of long-term early adopters, pushing the envelope on those early-buyer reactions to finding what they bought in January being sold for twenty-five percent less at the end of July.

We always knew Steve Jobs was a wizard of technology. With this latest move, it's clear that Jobs has mastered the art of the financial shell game, to the detriment of the loyal early adopters who paid the price -- and then some -- for being first on their block to own the hottest cell phone around.

Also published on the GLG News and Consulting Web site: http://news.glgroup.com. iPhone image source: Apple.

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