Apple May Offer IPhone Cases, Rebates to Address Flaw

Apple Inc., looking to avoid a recall of the iPhone 4, may give away rubber cases or offer an in-store fix to address a design flaw in the newest version of its top-selling product, according to analysts.

The company, which is holding a news conference at 1 p.m. New York time today, doesn’t plan to announce a recall, a person familiar with the matter said yesterday. Chief Executive Officer Steve Jobs may instead offer the giveaways or refunds to dissatisfied customers, some analysts said.

“The most important thing that Steve has to do is get up there and admit there’s a problem, tell the truth, and then apologize for it,” said Charlie Wolf, an analyst at Needham & Co. in New York. “People love Apple. All they need is an excuse to come back. An apology is the way to go.”

Apple scheduled the event, at its Cupertino, California, headquarters, after iPhone 4 users complained about reception problems. Some customers say calls are dropped when the device is held a certain way. Apple engineers warned Jobs last year that the metal antenna surrounding the phone might interfere with calls, according to another person with knowledge of the matter.

Consumer Reports said this week it wouldn’t endorse the iPhone 4 following tests that showed problems sending and receiving calls.

Apple rose 41 cents to $251.86 at 10:06 a.m. New York time in Nasdaq Stock Market trading. The shares, up 19 percent this year before today, have dropped 7.2 percent since June 23, a day before the iPhone 4 went on sale.

Apple declined to elaborate on what will be discussed.

In-Store Fix?

Maynard Um, an analyst at UBS AG, said Apple could give away free Bumpers -- rubber and plastic iPhone 4 cases that the company now sells for $29 each. Keith Bachman, an analyst with BMO Capital Markets, said the company might offer refunds to unhappy customers. Gene Munster at Piper Jaffray & Co. said there is a “50 percent chance” Apple sends iPhone 4 users to its stores for a free “in-store fix” consisting of a coating that surrounds the antenna.

Katy Huberty of Morgan Stanley said Apple needs to extend concessions to disgruntled users to “preserve the brand and loyal customer base.” Abhey Lamba, an analyst at ISI Group Inc., said Apple has to do something to counter the negative publicity generated by Consumer Reports’ findings.

Product Recall?

None of the analysts say a product recall is likely.

“Many existing iPhone users are not complaining about the issue, but the backlash from the issue will limit Apple’s ability to attract new users,” said Lamba, who is based in New York. “At the very least, many users might decide to wait for a redesign to adopt the new phone.”

Photographer: David Paul Morris/Bloomberg

Apple Inc.'s iPhone 4. Close

Apple Inc.'s iPhone 4.

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Photographer: David Paul Morris/Bloomberg

Apple Inc.'s iPhone 4.

Lamba is one of 44 analysts tracked by Bloomberg that recommend buying the stock. Four rate Apple “hold,” and none advises selling the shares.

Um at UBS estimated that offering free Bumpers would shave about 2 cents a share off Apple’s earnings in the quarter ending in September. BMO’s Bachman said the Bumper giveaway would have “a very small financial impact” of less than 2 cents a share. Both he and Um are based in New York.

Salespeople at Apple retail stores in New York, San Francisco, Los Angeles, Houston and Seattle said yesterday that the iPhone 4 was sold out and that customers should expect a two- to three-week wait for the device.

Recall Odds

Apple is telling visitors to its website that iPhone 4 models will ship within three weeks. The company sells a 16- gigabyte model for $199 and a 32-gigabyte version for $299. Those prices require U.S. customers to sign up for a two-year service contract with AT&T Inc.

In the three weeks since Apple released the iPhone 4, users have complained about losing reception when they cover the lower-left corner. Paddy Power Plc, Ireland’s biggest bookmaker, said this week that the odds of a recall increased after the Consumer Reports review, leading to a “betting frenzy.”

A recall could cost as much as $900 million if there were a problem with the device’s hardware, David McQueen, an analyst at Informa Telecoms and Media, said in a Bloomberg Television interview. “Since its launch it’s been the darling of the smartphone industry. Apple’s competitors will be hoping it’s a chink in its armor.”

‘Master of Branding’

The iPhone, introduced in June 2007, is Apple’s top-selling product, accounting for about 40 percent of revenue. The company, which reports third-quarter earnings on July 20, sold 1.7 million of its latest iteration in the first three days.

The iPhone 4 has a new design, with the antenna built into a metal band that surrounds the phone, instead of inside the device. Apple suggested last month that users either buy a case or avoid holding the lower-left corner of the phone in a way “that covers both sides of the black strip in the metal band.”

“The best thing to do is to address the issue head on,” said Marc Benioff, CEO of Salesforce.com Inc. and an iPhone user. Jobs “will probably want to put this antenna issue behind him. He’s the master of branding and will show the world how to deal with this and move on.”

To contact the reporter on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net

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