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A Very Sour Note for Apple

By Arik Hesseldahl and Peter Burrows After a debut three weeks ago that met with rave reviews, Apple Computer's (AAPL) iPod Nano just had its first hiccup. Computer maker Apple on Sept. 28 conceded that some of the screens on its latest music player are subject to cracking and scratching.

Apple took pains to play down the flaw, saying only a fraction of the Nanos shipped are affected. "It's a real but minor issue," says company spokesman Steve Dowling. "It's a vendor-quality problem in a small number of units. It's affected less than one-tenth of 1% of the total Nano units that we've shipped. But it's not a design issue." And Apple has pledged to replace cracked devices, advising customers with damaged screens to contact it directly.

ONLINE COMPLAINTS. The flaw casts an early cloud -- however small -- over a product that had a successful, high-profile launch and one that up to now has had few critics. And the announcement, coinciding with a downgrade of Apple's stock by Merrill Lynch analyst Richard Farmer, didn't do its stock any favors. Shares closed down $2.36, or more than 4%, to $51.08 on Sept. 28. A slowdown in the pace of Apple's sales growth should start in the next one to three quarters, wrote Farmer, who cut the shares to "neutral" from "buy."

The screen problem emerged after users complained to Apple and reported their experiences in various online forums in the last several days. Apple hasn't identified the vendor that supplied the faulty screens, and analysts who have taken apart the Nano haven't been able to identify any of what may be two or more companies supplying Apple with the displays.

David Carey, president of Portelligent, another research firm that has examined the components inside the Nano, suggested that the cracked screens may be the result of a confluence of factors. He says there's a tender spot on the player's front between the click wheel and the bottom portion of the screen that could act like a drumhead.

ROUGH HANDLING? He also speculated that some displays may have slightly thinner glass that, when subjected to certain kinds of pressure, doesn't hold up as well. "I don't have a large sample size in order to compare all the differences, but it's safe to assume that it has to do with several factors coming together in a fatal combination." Apple, meanwhile, isn't elaborating on the exact cause.

Problems started cropping up soon after the Nano's release, says Ryan Arter, president and owner of Olathe (Kan.)-based ResQ Systems, a company that repairs iPods as well as other Apple products. So far, ResQ Systems has fixed about 50 Nanos. "We've gotten a lot of repair requests for the Nano," Arter says, including one on the day after the product was released. "It's just an opinion, but it feels like a trend."

But Arter also suspects customers are being too rough with them, in part because they think they're invincible after Apple switched from using hard drives, which tend to be more fragile, to flash memory. "The screens don't just break for no reason," Arter adds. "They're so small and light that people forget they're in their pocket. The public perception is that you can just throw these things around. But if the hard drive used to be the most fragile part, it's now the screen."

BUY PROTECTION. Apple is not replacing Nanos in cases in which the screens are simply scratched. "A few vocal customers are saying the Nano is more susceptible to scratching," Apple's Dowling says. "But we've received very few reports from consumers, and we do not believe it's a widespread issue."

Dowling notes that the Nano is made with "the same high-quality polycarbonate plastic" used for other iPods. "If customers are concerned about scratching," he says, "they should use one of the many cases that are now becoming available." Or, if their concern runs deep enough, some customers may rethink buying a Nano in the first place.

Hesseldahl is a reporter for BusinessWeek Online in New York, and Burrows is Computer editor in BusinessWeek's Silicon Valley bureau

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