Crunch time for Apple as love affair turns sour

By Stephen Foley

Apple, the $320bn technology giant, is preparing to confront the biggest public relations crisis in its history, amid technical problems afflicting its latest iPhone and a warning that "an emerging pattern of hubris" could wreck the public's love affair with the company.

It emerged yesterday that senior engineers warned early in the development of the new iPhone 4 that its choice of aerial could lead to dropped calls and poor reception.

But the company ignored their concerns and when customers first complained about the fault wrongly blamed the problem on a software glitch.

On Friday morning, US time, the company will hold an emergency press conference in an attempt to reassure customers - and investors - that it has the problem under control.

On Wall Street, where Apple has been the darling of investors for almost a decade since it unleashed the iPod music player on the world, its shares have tumbled, while the company faces a future of increased scrutiny by competition watchdogs and intense competition from newly emboldened rivals.

Apple has summoned media and industry players to its headquarters in Cupertino, California, in a mood that is a far cry from the iPhone 4 launch event last month.

Then, with typical hyperbole, founder Steve Jobs declared it "the biggest leap forward" since the original iPhone in 2007, and 1.7 million people snapped up the new device in the first two days, making it Apple's most successful product launch ever.

But users immediately started complaining of dropped calls and independent consumer tests laid the blame at the door of the phone's aerial, which is built into the case.

Apple's original explanation, which blamed in part a software problem, was widely dismissed - dealing a blow to the company's reputation for leading-edge technological competence - and Mr Jobs's advice that users should "just hold it right" was pilloried for its high-handedness.

Consumer Reports, the US product testing magazine similar to the UK's Which?, sensationally issued a recommendation against buying the phone this week, the first time it has given a thumbs-down to an Apple iPhone.

Its suggestion that users have to use duct tape to solve the antenna problem added to the public relations nightmare for Apple's engineers.

Yesterday it was reported, by Bloomberg News, that Ruben Caballero, a senior engineer and antenna expert at Apple, had told management last year that the device's design may cause reception problems, as did engineers for a phone company that was testing the device. Apple declined to comment.

The company's shares were falling again yesterday, after a sharp decline on Tuesday following the Consumer Reports findings.

In May, Apple surpassed Microsoft for the first time to become the biggest technology company in the world by stock market value, an emotional moment for both companies given the decades of rivalry between them.

Apple shares, already riding high on strong sales of its iPad tablet computer launched in the spring, had surged to record highs as the iPhone 4 was unveiled.

But there were warnings from Wall Street that the antenna debacle, and the company's botched response to it, could hurt sales.

"We note that many existing iPhone users are not complaining about the issue but the backlash will limit Apple's ability to attract new users," ISI Group analyst Abhey Lamba said.

"At the very least, many users might decide to wait for a redesign to adopt the new phone. We believe that doing nothing is not an option any more."

Other analysts have been more scathing, saying the company is in danger of falling out of public favour. Toni Sacconaghi of Bernstein Research warned about 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".

Examples include "limited disclosure practices, its attack on Adobe's Flash, its investigation into its lost iPhone prototype (which culminated in a reporter's home being searched while he was away and computers being removed), its restrictions on app development, and its ostensibly dismissive characterisations of the iPhone's antenna issues".

Mr Sacconaghi concluded: "These issues may, over time, begin to impact consumers' perceptions of Apple, undermining its enormous prevailing commercial success."

Regulators in Europe and the US have begun preliminary inquiries into a number of areas of Apple's business, concerned that its success has led it to improperly restrict competition.

The company also faces a growing number of lawsuits in the US over the iPhone, including compensation claims from buyers of the iPhone 4 who allege design defects and negligence.

A judge last week gave permission for a class action lawsuit challenging Apple's deal to hitch all its iPhones exclusively to the AT&T phone network in the US, which many users blame for poor phone coverage and dropped calls.

The iPhone is more important to Apple's profits than any of its other products, including the Macintosh computer and the iPod, and it accounted for 40 per cent of sales in the first three months of this year.

Shelly Palmer, technology consultant and founder of Advanced Media Ventures, said critics were underestimating the ferocity with which Apple's fans would stick by the company through its difficulties.

"Apple is not a company, it is a religion. You are a supplicant of Steve Jobs, who is a world leader in making you buy stuff you don't need with money you don't have. People do lose religion - but I'm not sure they will over this antenna problem."

Apple remained secretive last night about what fix it might announce today, and whether the famously controlling Mr Jobs would make a public appearance to announce it, but rumours that it might launch a full-scale product recall were dismissed by people who know the company best.

A rubber "bumper", which wraps around the edge of the phone, is currently on sale for around US$30 and Wall Street analysts speculated that Apple could offer free bumpers to people buying the iPhone 4.


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