Imagining the Unimaginable: An iPhone 4 Recall

Perception often has a way to turning into reality. Just a month ago the tech market was gripped by iPhone 4 fever. Now, the conversation has shifted and some public relations executives say that a recall is likely, if not  inevitable. 

Advised against buying the iPhone 4, Consumer Reports concluded from its testing  that the iPhone 4's antenna problems are not related to software and more serious than Apple has let on.

As if that was not enough, Apple's been taking a shellacking in the blogosphere after the tech blog TUAW reported that the company had deleted a message thread on its online support board related to the Consumer Reports news.. (Here's the cached version.)

What are the odds that Apple would feel enough pressure to order a recall? Place your bets. This is a company that prides itself on dancing to its own drummer; a strategy that has proved Apple right more times than the critics. But while Apple continues to sell huge volumes of iPhone 4s, this is the sort of perception problem that can quickly root  itself  with the wider public. This is no longer an arcane debate confined to the tech community. When the antenna complaints first surfaced, that may have initially been the case. Now Consumer Reports has become involved and the controversy has gone mainstream. "If geeks are the canary in the coal mine," writes CNET's Molly Wood, "Apple would do well to start counting carcasses. And as Consumer Reports goes, so goes much of America."

In a research report today, Sanford C. Bernstein & Co analyst Toni Sacconaghi said that ultimately, the news cycle may force Apple's hand in the matter.

While logical arguments can be made that suggest that iPhone momentum remains strong and the antenna issue can be "solved" with a rubber case, the press appears to be increasingly crying foul at Apple, which suggests that Apple's image - and potentially iPhone sales - could be compromised if Apple does not explicitly and constructively address the issue of what it believes is wrong with the phone and how it will address it. We see the potential for a cycle of press reports triggering downward pressure in Apple shares and believe that Apple needs to explicitly and constructively address the iPhone 4's reception problems - ideally with an explanation for the root cause of the antenna issue, and a solution(s) for addressing it.

Still, Sacconaghi termed the possibility of a full product recall of the iPhone 4 as "highly unlikely." But in the event of the worst case scenario, she said a recall would cost Apple. $1.5 billion.

Perhaps the bigger longer term concern for Apple investors is the emerging pattern of hubris that the company has displayed, which has increasingly pitted competitors (and regulators) against the company, and risks alienating customers over time."

Android now comprises 13 per cent of the smartphone market, up 4 percent from Comscore's previous check. Meanwhile, the same report found that more established players in the smartphone market - including Apple - saw their market share decrease. To be sure, Apple's decline was modest, down 1% but every percentage point is important. Whether the controversy over the iPhone 4 will accelerate that trend is also enough to weigh on the minds of money managers who trade in the stock.