Free iPhone: Apple Offers $100 Credit, Apology to IPhone Buyers

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Apple Inc. Chief Executive Officer Steve Jobs apologized to customers who paid full price for the iPhone before he cut the cost by $200 yesterday.
In an open letter on the company's Web site, Jobs said users who bought the phone before the discount and got no other rebate will receive $100 in credit at Apple's retail or online stores.

``Our early customers trusted us, and we must live up to that trust,'' Jobs wrote today. ``We apologize for disappointing some of you, and we are doing our best to live up to your high expectations of Apple.''

The rebate and price cut raised concern that demand may have stalled, hurting Jobs's effort to sell 10 million iPhones in 2008 and take on Research In Motion Ltd. and Motorola Inc. Cupertino, California-based Apple plans to sell its millionth iPhone by the end of this month. The iPhone, a combined iPod media player and mobile handset, went on sale June 29 for as much as $600.

Apple shares fell $1.75, or 1.3 percent, to $135.01 at 4 p.m. New York time in Nasdaq Stock Market trading after a 5.1 percent slump yesterday. The stock has gained 59 percent in 2007.

"It remains to be seen if the store credit will heal all wounds,'' said Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co. in New York. ``It certainly acknowledges that the decision to lower the price so quickly had a significant negative impact on sentiment among its customers.''

The company will give details of its store-credit plan next week, Jobs said. He said yesterday Apple will sell the 8-gigabyte iPhone for $399 to spur sales in the holiday period, which accounted for 30 percent of fiscal 2006 sales.

``We have the chance to `go for it' this holiday season,'' Jobs said in the six-paragraph letter.

Apple will phase out the lower-end, 4-gigabyte version of the iPhone because customers prefer the model with more storage. The iPhone, only available in the U.S. with a two-year AT&T Inc. service contract, is slated to come out in Europe this year and Asia by 2008.

The 33 percent price reduction shows Apple is having trouble convincing customers to switch to the iPhone, said Global Equities Research analyst Trip Chowdhry.
The store credits will cost Apple about $60 million in revenue, based on about 600,000 iPhone owners, he said. That would subtract about 2 cents from profit, he said.

``Apple's iPhone is suffering from significant strategic and tactical missteps,'' said the analyst, lowering his rating on the computer maker's stock to ``equal weight.''
Right Decision

Jobs, 52, said he received hundreds of e-mails from customers who were angry that the company cut prices two months after the product's introduction. He read each one, he said.

This is the second time Jobs apologized to Apple supporters in the past year. In October, he apologized to shareholders after acknowledging that he knew some stock-option grants to employees were backdated to inflate their value.

``I am sure that we are making the correct decision,'' Jobs wrote. ``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.''

The holidays and the back-to-school shopping period are Apple's two biggest sales quarters. Jobs announced the price cut the same day he unveiled new iPods, including one with the same 3.5-inch touch screen and Wi-Fi support built into the iPhone.

``I was a little pissed off they cut the price two months after I bought it,'' said Mike Guirguis, who stood in line in Arlington, Virginia, to buy the iPhone when it debuted. ``One hundred dollars makes me feel a little better -- not $200 better, just $100 better. It's a store credit, not cash.''
The rebate may also be a tactic to boost sales, said David Garrity, director of research at Dinosaur Securities Inc. The credit won't cover the price of many Apple products. It's enough for a $79 iPod Shuffle, accessories such as cases, and iTunes gift cards.

``It will likely stimulate the sale of more products, since what can be bought from Apple for under $100?'' said Garrity, who is based in New York.
Some early iPhone buyers said they knew the technology would get cheaper over time, echoing Jobs's remarks that it is the nature of the industry. Ioan Crisan, who bought two on June 29, said the $100 credit proves Apple was trying to care for users.

``I knew that eventually it was going to happen, but nobody would've probably predicted it would be this soon,'' said Crisan, 35, an engineer in Vero Beach, Florida.