Apple admits iPhone 4 reception issue, gives free case

CUPERTINO, Calif. (Dow Jones)--Apple Inc. (AAPL), answering mounting criticism over the reception issue and antenna design of its recently launched iPhone 4, admitted the phone drops more calls than the previous version and said it would give away cases as a remedy.
Apple "screwed up" with the signal algorithm of the phone, Chief Executive Steve Jobs said during a press conference on Friday. But he denied that there was a design problem with the antenna, sticking to the company line that the problem is common with all smartphones. He added the issue was blown out of proportion, and that there was no "Antennagate."
"Haven't we earned credibility for the press to give us the benefit of the doubt?" he asked.
Apple has sold 3 million iPhone 4s since they were available on June 24, and the device quickly became the company's fastest selling product ever. But the phone, which has an unusual antenna design, was immediately dogged by complaints about its reception, particularly when owners held the device in a way that covered the bottom left corner.
The problems cascaded into a full-blown public relations disaster for Apple, which initially told owners to hold the phone differently and then blamed the reception difficulties on software. The company's problems worsened when influential product review publication Consumer Reports said it could not recommend the phone. The escalating criticism is of particular concern for a company like Apple, which stakes its reputation on the quality of its products.
"To customers that are having problems, I apologize to them," Jobs said.
Consumer Reports determined that touching the iPhone's antenna, which wraps around the sides of the device, degrades the device's signal. It later recommended sheathing the iPhone in a case that covers the sensitive lower left section remedies the situation.
"We were stunned and embarassed" by the Consumer Reports conclusion, Jobs said.
Anyone who buys an iPhone 4 through Sept. 30 will get a free "bumper," a rubber-and-plastic band that wraps around the phone. Customers who have already purchased a bumper will get a refund. AT&T Inc. (T) subscribers who want to return the device can get a full refund and get out of their contracts without penalties.
An AT&T spokesman said the company supports Apple's move to provide a free bumper and said it would waive the restocking fees for returned iPhone 4s.
Apple's stock has taken a beating since the release of the new iPhone, dropping nearly 8% from record highs just a month ago. Its shares were recently up 44 cents at $251.89.
"The stock is incredibly undervalued," said Brian Marshall, an analyst at Gleacher & Co.
Jobs maintained that antenna challenges were universal for the industry, and showed videos of rival devices from Samsung Electronics Co. (SSNHY, 005930.SE), Research In Motion Ltd. (RIMM, RIM.T) and HTC Corp. (HTCXF, 2498.TW) replicating the signal problem. Jobs said it was impossible to make a smartphone without weak spots.
Research In Motion American Depositary Shares recently were down 6% to $52.34.
An HTC spokesman declined to comment, while Samsung and RIM weren't immediately available for comment.
"I can't see that making those comparisons will help to solve the problem," said Dan Hays, a director at consulting firm PRTM. "That's why I found it to be particularly surprising."
Jobs, who doesn't use a bumper on his phone, said customers will be able to choose the color bumper they want. They currently sell for $29 on Apple's website. The product is sold out; the website says the black bumper will ship in five to seven business days. Bumpers in other colors have a three-week waiting period.
Many industry observers have called the bumper giveaway the most likely--and least costly--solution to Apple's problems, even as speculation over a potential recall cropped up. UBS analyst Maynard Um estimated that the bumpers cost $3 each, and freely distributing them would cut into its fiscal fourth-quarter earnings by 2 cents a share. The company is expected to earn $3.10 a share when it reports fiscal third-quarter results on Tuesday. Jobs said he wouldn't provide an update on the financial impact of the free bumpers until its earnings call.
Despite the issues, Jobs called the antenna design the "most advanced" ever on a smartphone. He said that the rate of dropped calls for the iPhone 4 is roughly one more per hundred than the iPhone 3GS. While the number may seem small, Hays said that equates to roughly twice the average dropped-call rate for the average customer, which could alter how they perceive the quality of the network.
Most iPhone 4 customers are keeping the device. Jobs said that the return rate for the iPhone 4 to AT&T is 1.7%, or less than a third of the return rate for the iPhone 3GS. Only 0.55% of iPhone 4 owners have called Apple's technical support about the antenna issue.
Source: The Wall Street Journal