Analyst: Full iPhone 4 Recall Would Cost Apple $1.5 Billion

An iPhone 4 recall would cost Apple $1.5 billion, a Wall Street analyst estimated on Tuesday.

In a research report on Apple's increasing travails over the iPhone 4 antenna issue, Sanford C. Bernstein & Co analyst Toni Sacconaghi said a full product recall of the iPhone 4 would represent the equivalent of about 5 weeks of free cash flow or about 3.5% of its total cash balance.

"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," Sacconaghi wrote.

The issue became more urgent in the aftermath of a Consumer Reports announcement that it would not recommend consumers buy the iPhone because of issues surrounding the unit's antenna reception.

Sacconaghi said it was hard to gauge whether a software patch would resolve the iPhone's antenna issue or whether it would take in-stores adjusting by Apple-trained technicians. If it involves the latter, Sacconaghi said a "guess-timate" would put the expense to the company at $75 per unit, or $450M, "assuming 6 million 4th generation phones sold, in inventory, or in transit. If we assume the worst case - a full recall of the device and issuance of a new iPhone, which we believe is highly unlikely - it might cost Apple $1.5B."

The easiest option put forward by Sacconaghi: Issue rubber cases. The cost would be $1 per unit (or less.) But that would force Apple to eat a slice of humble pie and acknowledge a design issue with the iPhone. And that's where Sacconaghi noted a growing perception problem that may hurt Apple.

"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."

Referring to past controversies, such as Apple's lack of transparency about Steve Jobs health or its sattack on Adobe's Flash, and more recently, "its ostensibly dismissive characterizations of the iPhone's antenna issues," Sacconaghi said that "the worry is that collectively these issues may over time begin to impact consumer's perceptions of Apple, undermining its enormous prevailing commercial success."