The Son of Death Grip - Antennagate the Sequel: the iPhone 4b, and the 3 month loaner iPhone 4a

I am thinking this Monday morning about what does the 'rational customer' do about the iPhone 4. And a bit also about how much there are after-shocks from the Friday press conference. Lets first take a look at some types of customers and prospects, and what the Friday press conference brings to iPhone owners.

THE UNSCRUPULOUS OWNER

So, first, there will be some iPhone 4 owners who, due to their own fault, have caused some problem to their brand new iPhone 4, likely scratched the case or glass, or perhaps dropped the iPhone and caused some internal damage, etc. Normally they would know there is no chance to return it, as the problem was caused by the owner. But now they know that in late September, the last 2 or 3 days, there will be a flood of iPhone 4 owners returning their early iPhone 4's for full refund. If the person is unscrupulous, then why not try to return that iPhone 4 with the scratch or fault, and hope that the store is in such a hurry to process returns, that the iPhone 4 will be taken in, and a full refund made. Then the unscrupulous owner can go to another store as soon as the new iPhone 4b is released, and get a new, fully functioning and clean iPhone, with the bonus, that it will also have no death grip problem.

This will not be a large number of users, there isn't that much time to 'damage' the new iPhone 4, but there will be thousands, probably tens of thousands of such iPhone 4's, that normally would not have any chance of being returned. Now with likely a glut of returns in late September, there is a chance such 'questionable' instances will slip through the cracks. And there is nothing stopping the same unscrupulous customer trying alternate Apple stores and retailers one after another, in attempt to get the damaged iPhone 4 returned. The main point is that there will be more 'unjustified' returns with iPhone 4 than ever before for the iPhone and obviously for any to be refurbished and have their antennagate problems fixed, these additional problems will also be noticed and need to be fixed adding to Apple's costs relating to the returns.

THE PRUDENT OWNER

But then the honest and honorable current iPhone 4 owner. There are over 3 million iPhone 4 owners already. What does the prudent owner of an iPhone 4 do? It doesn't matter what they think of their iPhone 4 and if they have never experienced the Death Grip. Apple has now admitted the problem, apologized for it, and promised a technical solution to the hardware, expecting it sometime in the Autumn, around the end of September. Especially as Consumer Reports still does not endorse the iPhone 4, the question will haunt the early iPhone 4 owners, wherever they go with the iPhone 4, there will be people who will ask them, "have you experienced the Death Grip" - and then inevitably a discussion about Consumer Reports and about the latenight comedians and what so-and-so did to fix the Death Grip problem etc.

So even if a totally loyal Apple fan has an iPhone 4 that exhibited no problems at all, the prudent thing to do, is to return the early 'faulty' iPhone 4, and take the full refund, and return a couple of days later taking delivery of the new fixed iPhone 4b. Isn't this the prudent thing to do? Apple's CEO Steve Jobs has admitted that the iPhone 4 has a grip problem (even if other phones have it too, even if it is miniscule as a problem) - and Apple is now fixing that problem. Isn't the prudent thing to do, if you love the iPhone 4, to take that free fixed model, and consider this first 3 months as a 'free loaner' from Apple, of their 'beta' version, with its tiny bug (or bugs) and expect that the iPhone 4b is 100% as good as the iPhone 4a, but has the death grip fixed - and comes with the new software, and likely has any other known problems fixed too? Best of all, their beloved Apple brand now gives away a free case (the preferred option to the rubber band solution, for anyone who wants to replace) which helps ensure the 'test drive' iPhone 4a will remain pristine and scratchless until end of September.

TEST TO SPOT DEATH GRIP

And the Death Grip won't go away. In the next few months until a new iPhone 4b is released, there will be many opportunities to be reminded of the Death Grip. Any Apple customer who actually spots the problem - which is far more today than 0.55%, because most who experience a problem will not call to complain - and more will complain about dropped calls to the carrier/operator than to the handset manufacturer - because it seems like a network problem, not a handset problem (until now, that Apple has admitted there is a problem). If the iPhone generates 1 in 100 more dropped calls than 3GS, that means the problem is widespread and will be spotted by many users. In reality I think its fair to say at least 1% of iPhone 4 owners have complained (as some who call Apple will also call AT&T haha). And I think its also fair to say, that if the actual complaining number is 1%, the reality is 10 times bigger (as a rough rule of thumb from marketing theory and complaining customers). So we can roughly expect that about 10% have already today experienced enough of the Death Grip to have noticed it, while many will have thought its too trivial a problem (or too infrequent) to bother to complain.

Of course most ownes will get a case or rubber band, which alleviates (but won't eliminate) the problem of dropped calls. But now for every owner of an iPhone 4, whenever there IS a dropped call, they will think that is because of the iPhone 4 and its bad connectivity (rather than AT&T and its bad netwroks). About one third of iPhone owners have a second phone - so they will compare, how does the Blackberry connectivity do in this same spot. Remember one third of iPhones are sold in Europe, where half of consumers have a second phone. It will be very easy to see that the Death Grip is worse on the iPhone than on any other phone.

And then there is the occasional testing. Some friend has succeeded in replicating the iPhone Death Grip problem - well, obviously, "where did that happen" - suddenly you are playing 'connecting to the network' games with your friend, take your iPhone 4 out of its case, and see if you can replicate the problem in this spot - and if not, see if your friend can do it with your phone (and vice versa). There will be ample opportunities for most iPhone 4 owners, who didn't observe the problem prior to Friday, to now find evidence of a Death Grip by September 30. Is that 10% of all iPhones sold or 20%, who knows. But it will be far more than 0.55%. It will definitely be more than 5% of all iPhone 4a models sold.

VALUE LOSS OF iPHONE 4a

Remember that in many countries there is a thriving second hand market for phones, in particular for premium smartphones. There will of course be a second hand market for the iPhone 4, but then, there will be a significant price differential for selling a used iPhone 4b, which has the death grip cured, or attempting to sell an early iPhone 4a - facing the inevitable question 'why didn't you get the free upgrade to the new version when you had the chance?' and the price of the iPhone 4a will be significantly less than iPhone 4b. Again, what does the prudent iPhone 4 owner today do? Even if the owner who has never experienced a death grip problem, it will be the safe thing to do, to get the newer iPhone 4b, and therefore to return the early iPhone 4a, by September 30 (and then use the money to go buy the newer iPhone 4b). This will impact international owners far more than US owners, due to the stronger resale market in most international markets, and the wise decision by anyone with an early iPhone 4a, is to replace it 'for free' with the iPhone 4b, as soon as possible. Why not, you get the exact phone with a problem fixed (whether the user has experienced the problem or not) but definitely acquiring an newer iPhone 4b model, that has a better resale value. This is the wise thing to do, and I would say far more than half of early international iPhone 4 buyers will end up doing this.

THE UNCERTAIN OWNER

Now, lets consider next the owner who really believes in Consumer Reports, or who really thinks that if Apple CEO admits there is a technical problem (no matter that others may have it too, or no matter how tiny the problem may be) - that it doesn't make sense to buy this faulty product. Some of those will postpone their purchase until there is a new iPhone. But this promise now that Apple gives until Sept 30 for full refund without stocking fee, means that those uncertain owners can safely go and buy the iPhone 4 now - but these customers will definitely all replace theirs when the new iPhone 4b will come out, so they will all just use the next two and a half months for a free trial of the faulty iPhone 4, before taking delivery of that model of iPhone 4b, that they want. The fixed version.

So its a mixed bag for Apple with these very cautious buyers. Yes, they will now not 'wait' for the new iPhone 4b, but the problem is that for these customers, 100% of them will end up returning the iPhone 4a - and this will be a large number. It could be a million users by Sept 30. That is a huge number of returns, very costly for Apple and for the carriers supporting the iPhone. That also means that when the iPhone 4b will be sold (perhaps in early October) - then a large number of the early sales are only replacement sales for returned iPhone 4a's. This means a lot of sales and shipping effort which in effect results in no growth in Apple's installed base, at all. For any cautious buyer today, yes they'll go take the iPhone 4a, but these will need 'two sales' to produce one iPhone 4 owner by late October...

Still, while that hurts late September returns and early October sales, at least it does not 'stall' the sales of iPhone 4 in late July and August. That would be devastating. So yes, this is costly for Apple and far from optimal, but it at least keeps the iPhone 4 sales (to this segment) continuing more or less as usual for the Summer.

THE OPPORTUNISTIC OWNER

Then lets consider what this means to the opportunitistic consumer. If you are pretty sure you want some other brand smartphone, for example the Nokia N8 which won't ship until a couple of months from now, but you are entitled to a phone upgrade now - why not go take the iPhone 4 for a 2 month 'extended' test drive now. You know you won't keep the iPhone but Apple promises total return including no restocking fee by September 30. And what you normally do NOT get - you get now a free case! So you can be sure your free loaner iPhone 4 will be pristine and scratch-free at the end of September when you return it, and replace it with your favorite smartphone brand, whenever that model happens to be out. Its a bit like the BMW fan, who gets to drive around in a brand new Jaguar for free for a couple of months, before the new BMW model is released..  Almost too good to be true?

How many will do this? I don't think its a large number but there will be those who will do it, for sure. Tens of thousands for sure, maybe even hundreds of thousands.. Also there will be some instances where a person who thought 'I will never love the iPhone but I'll take it for the free trial for 2 months' - will actually fall in love with it, and turn into an Apple loyalist. But - if for example you want a good camera, or you want a QWERTY keyboard, etc, then it doesn't really matter, you will return the loaner iPhone 4 by late September and get that new smartphone you really wanted. There will be considerable further costs of returns that are this type of opportunitistic customer.

IMPACT TO iPHONE SALES

So what? There will be some who will not buy an iPhone 4a, because of the admitted problems. That is human nature. So some of Apple's demand in July-August, will remain unmet, until the new iPhone 4b is out in October or so. That is not 'lost sales' for the most part, it is just delayed sales. But there is always the danger, that the customer who would have loved an iPhone in August, will fall for a rival smartphone in September and be a lost sale. That is natural, it is definite, that there will be some lost sales due to Antennagate, no matter what. That is what happens when you release a product that is flawed, but thankfully for Apple, there will never be a total factual knowledge of exactly how many iPhone 4 sales were lost due to Antennagate. I would say it is in the magnitude of under a million in this next quarter and like I said, its a number that can never accurately be quantified. Apple's iPhone 4 sales will hit a record in Q3 the July-September quarter, no matter what. The only thing is, that there is what the economists call an 'opportunity cost' - sales that could have been but that is now lost.

The bigger effect is the free trial effect. There will be a 'record' return of iPhone 4a models in September, around the last week. This will definitely be more returns in one quarter, than Apple has ever had for any full year, could well be more returns than Apple has had in its first 3 years.

If Apple has sold 10 - 15 million iPhone 4 models by September 30, then I think its fair to guess at least 10% are returned (remember, it is what a prudent iPhone 4a owner should do, if he or she is 'rational' about it), and in worst case could be as high as 30%. These returned iPhones will almost all be then replaced with iPhone 4b's in October, which drains the new shipments of the new iPhone 4b causing its own set of delivery delays, and crowding out some random new buyers who may not like the delays that this will result (giving opportunities again to rivals).

So from the accounting point of view, the iPhone 4a will mostly fulfill the demand that was there for the iPhone 4 prior to any problems. The unit sales impact is that at the end of September probably a couple of million iPhones will be returned and from the Q4 unit sales of iPhone 4b models - most of the early sales is replacements to returned iPhone 4a models. There may be some returned iPhone 4a models accounted out in the Q3 period, but mostly they will fall into the Christmas quarter period, damaging the total new sales of Q4. So the sales for iPhone 4 in Q3 (July-September quarter) will mostly not be severely hurt, but sales in Q4 will be significantly below the number of actual 'shipments' where many 'sales' of iPhone 4b will go as replacements of returned iPhone 4a models, which Apple has to account as returns.

I can say the operators/carriers are not happy to handle a million or more returns in September, only to have to 'resell' to those same customers another iPhone 4b in October. There will be arguments about phone numbers, there will be further 'tester' phones - someone takes a 3GS model from end of September into late October as they await the new iPhone 4b model (under the 'standard' 30 day trial period) - adding further costs to the carriers and Apple, etc...  Carriers/operators will not be happy with Apple about this all. We have to see if some carriers/operators actually stop selling iPhone 4a, before the 4b is released ).

WHILE WE ARE ON iPHONE

So on Friday I thought the Antennagate was pretty well covered and over. I didn't expect Consumer Reports to come back and say, they still don't endrose the original iPhone 4 (until it is technically fixed). So the free case did not satisfy Consumer Reports. This means that the story will continue in the press far more 'loudly' than Apple had hoped. Just now I see on CNN's news ticker (its Monday morning in Hong Kong) that CNN says Consumer Reports still doesn't endorse the iPhone 4.  Bad news continuing.

Meanwhile the idea of mentioning rivals at the press release did not go over well for Apple. So far at least Motorola, HTC, Nokia, Samsung and RIM have protested about Apple's 'self-inflicted problem'. What we now can expect, is plenty of consumer study groups to take popular smartphone models and compare to see whose 'Death Grip' is worst - and here Apple really doesn't want to get into this argument, they will now propel many news cycles more, where regardless of what the analysts find about the rivals, they will time and again, remind audiences that yes, the iPhone 4 does have a Death Grip problem - and most likely the finding is like with Consumer Reports - that the problem is worst for iPhone 4 (as they admitted, this is a radical antenna design - which Apple knew had bigger problems with dropping calls, than Apple's own previous phones - and Apple is certainly not the master of cellular telephones, they are only 3 years into this technology). So how many of Apple's carriers/opeartors will delay the launch? oiuth Korea's KT has already announced a delay in its iPhone 4 launch. More to follow?

So now because Apple had to pick on the rivals, it has all-but-guaranteed there will be ample more coverage of Death Grip comparisons, where Apple's iPhone 4 will never come out better than rivals. The best Apple can hope for, is that others are verified to have the same level of Death Grip (unlikely). More likely Apple comes out as one of the worst Death Gripsa and miscellaneous rival phone makers come out better. And imagine the furor, when some trusted independent sources find that in their tests, Apple does have a serious problem, but one or more of the phones Apple used in its video - the problem is not as serious as Apple claimed. Ouch. Apple has almost challenged the independent labs to go disprove their claim. And as radio environments are tricky, no doubt some will be able to prove that at least some of the claimed rival phones does not have that degree of a problem as Apple claimed - now Apple seems to be twisting the story about its rivals. If and when that happens, Apple looks like it has bended the truth (again) and that raises yet another media cycle of Apple-bashing, about the same issue that was supposed to be done and dusted on Friday.

RUBS SOME THE WRONG WAY

So then the abrasive style that Apple had in its press conference has rubbed many the wrong way. This ends up coming to hurt Apple. In its multimedia show, Apple mentioned that the iPhone 4 has the best smartphone recommendation at PC World. Not anymore it doesn't. After the press conference PC World has removed the recommendation and now does not offer a rating (the 3GS is there, rated 8th best smarpthone, HTC holds top spot). Apple tried to spin the story - to ignore the fact that the Death Grip is unique to iPhone 4, and kills phone calls. On any other phones, only the signal is reduced. No other phone manufacturer has resorted to emergency solutions of 'you have to use a case to avoid the termination of calls'.. 

This is likely to expand too. There are all those sites who love all things Apple, who have had time to already express their love. They can't 'help' by reminding people that they still love the iPhone 4. There are all those sites who did honest comparisons and analysis, who came to the conclusion that the iPhone 4 is great, and say so. They have no reason to come back now and reinformce their finding. But there will be plenty who didn't like what Apple said or did - or perhaps also, who think that they didn't consider dropped calls 'seriously enough' and now come to revise their view. There won't be any sites who hated the iPhone 4 who suddenly now love it. There won't be any 'migration' that way. But as we see from PC World, and that Consumer Reports has to make a big deal about it, that they still don't endorse the iPhone 4, there will be a nasty growing bunch who change their minds or who make noise about the bad news. As long as Antennagate is in the news, it is a 'lose-lose' situation for Apple.

And then there is the 'rest of the world'. The iPhone 4 is now going on sale in over a dozen more countries shortly. Each of them has their own testing labs and consumer advisors. All trust Consumer Reports and follow what CR says. All will want to do an honest test - and will test extra hard, to try to replicate Death Grip, because not only does CR say it exists - Apple itself has said there is a problem. Many of these labs would never have bothered to try to test for Death Grip. Now everybody will expect it. So now the national tech advisor sites and magazines will want to test 'thoroughly' how serious the problem is. And understand, they will rather want to test the Death Grip for an extra week or two, to be sure they are not claiming it doesn't exist - rather than to find the problem and be able to verify it does exist - and advise their audiences exactly how serious the problem is...

The problem is not going away. I do think it will diminish, but we will now find some ripples this week in the US oriented press, but then we'll get 'bursts' of bad news in many other countries as their national testers discover proof of Death Grip. And then is the ticking time bomb, where is the first major analyst to test Apple's claim that all smartphones have this problem....

SO CLOSE, YET NOT

Since Apple was going to give out the free cases, and as they knew 16,500 people had already called Apple to complain, and as they knew the dropped calls were 1 in 100 calls more than with previous iPhones - why didn't Apple just forget about the rival phones, and simply say, "yes there is a minor problem, we are sorry about it, and we will fix it, and we will give all a free case". That was all in the SCRIPT for the day. That would have been a 100% home run. What on earthy compelled Steve Jobs to now introduce the isue about rival pohnes - where Apple knows full well, no other phones have as bad a Death Grip problem as their phone. What was tehre to gain out of it, except now the pain of weeks more of Antennagate? Why include that unnecessary hostile attack on the rest of the industry. That was a red flag to the rivals, and a clear challenge to the press to go compare. This is a lose-lose for Apple, even if others are implicated too, every time Death Grip is mentioned, Apple is the leading culprit of the news story. Every time the iPhone 4 is reminded to have Death Grip problems! And for every story where rivals are also implicated, there will be stories where at least one of the rivals is not shown as bad, or in the worst case, that Apple's iPhone 4 comes out worst at Death Grip. Apple's news coverage will be bad - or worse. Bad news, bad news and more bad news. Now the problem is NOT going away and Apple is hearing much more about Death Grip...

So even where Death Grip has nothing to do with the story, like the Quarterly results coming out this Tuesday (and unit sales of IPhones from April to June did not have time to be impacted at all by the Death Grip story by June 27, the last day of sales counted into this quarter) - the press stories will mention Death Grip, and worse, if iPhone sales are even slightly below 8.75 million units of Q1, then the press will 'question' whether the drop was due to Death Grip (as it could not have been, but most journalists won't know that, and the Death Grip is now the news) - and roll out a bunch of analysts who hopefully mostly will say, no Death Grip did not impact June sales - but then they will add that it hurts July sales etc.. and the news is not the awesome iPhone sales growth for Q2, it is Death Grip again... Apple could have killed Death Grip on Friday, but it looks now that they failed and this story will be how the Summer of Apple 2010 will be remembered... Not happy time at Apple HQ. Didn't their PR people understand the basics that if you go wrestle with a pig, you end up just as dirty as the pig, except that the pig loves it...  haha...  Since Apple was going to apologize anyway, to admit the problem anyway, and give free cases anyway, then be nice about it. The story would have been over..

 

 

Thats how I see it now on Monday morning..  We have to see. I honestly did think on Friday that it was over, I thought Apple did the right thing with the free cases and felt that was fair. But now, judging by the reactions over the weekend, I now am pretty sure it is not over and Apple will continue to suffer Antennagate for the next months until iPhone 4b ships. (No wonder Apple is now supplying cots to their Antenna engineers - haha, says something that this 'working our butts off' degree of Apple urgency of fixing the problem did not really become that urgent, until Consumer Reports did its piece. Thank goodness for Consumer Reports. Without it, Apple might never have bothered..)

And sadly, where the iPhone 4 did truly move the goalposts with Retina Display, that great tech improvement is now totally overshadowed by Death Grip.

Comments

[em]

Yes,

I think even the lousiest sales guy and PR person knows that NEVER EVER bash your competitors or their products. Only tell about the good features of YOUR product.

And if you make a mistake, admit that, say sorry and fix the problem. The reason is what you say here. The goal is to kill the bad news from spreading. Apple admitted but didn't say sorry loud enough, partially fixed the problem with the free case, but then made a comparison. It is good to compare your products to competitors, but very, really unprofessional to do that in public.

This "Antennagate" will be a very famous case study how NOT to handle your product complaints and it will probably last years in the textbooks.

[Carlos]

Hello Tomi

There's one thing I don´t understand. If someone has an iPhone 4 and wants to return it, what happens with the ATT contract? Maybe the contract will dissuade people from returning the phone?

I remember that here in Spain Telefonica decided to increase the tariff (it passed from billing seconds to billing minutes) and when people complained and wanted to cancel contract, Telefonica said that Ok, but you have to pay the subsided phone.

[Enyibinakata]

Tomi,

Why did Apple go with such radical design? Did an attempt to sidestep Nokias antenna patent influence this crazy decision?

[Less the Best]

This whole episode really made me wonder if publicity have been too good for Apple. I mean that they really thought their version will be the mainstream news like always before.

I remember Steve Jobs comparing iPhone's browser and Nokia (was it N95's) browser showing them side by side. It was clear that iPhone outperformed Nokia ...

Then later I read that Nokia's browser was showing also Flash content and it could be seen in Steve's comparison ... But no-one really cared. It was just footnote even I still remember the that iPhone was the fastest.

This is the way Apple has been spinning the tech-media in details ... and maybe they really believed that they still can.

[Teemu]

Tomi,

you talked about people taking the iPhone 4 for a test drive for three months and then returning it by September 30th. However the right to return the phone is only available for 30 days from the date of purchase, not for three months as you can see here: http://www.pcworld.com/article/201283/apple_iphone_4s_not_perfect_take_a_free_case_or_full_refund.html

So the people who bought the iPhone 4 at release will have to return it soon and use a spare phone for a couple of months while they wait for a hardware revision that has not been officially announced. I don't think many will take a gamble like that.

There have been rumors of course that the phone has already been revised to some extent http://www.mcvuk.com/news/39984/Has-Apple-quietly-redesigned-the-iPhone-4 but I haven't seen a confirmation. The September 30th date that you keep talking about is the deadline for the free bumper program not for the refunds which is 30 days from the date of purchase.

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