Is Apple losing its touch?

Apple, the £150bn technology giant, is this morning 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.

Today the company will hold an emergency press conference in an attempt to reassure customers – and Wall Street – 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 launch event with founder Steve Jobs last month. Then, with typical hyperbole, he declared it “the biggest leap forward” since the launch of the original iPhone in 2007, and 1.7 million people snapped up the new device in just the first two days, making it the company’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 of the phone.

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.

Ruben Caballero, a senior engineer and antenna expert at Apple, informed the company’s management last year the device’s design may cause reception problems, as did engineers for a phone company that was also testing the device, Bloomberg News reported yesterday. 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, after surging on news of strong sales for its iPad handheld computer launched in the spring, had surged to new 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 even 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” and 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. Because all applications that can be downloaded to the iPhone have to go through Apple’s App store, it has veto power over developers and is also preparing to control advertising sent to users’ phones. Its dominance of the music market, thanks to iTunes, is also under scrutiny.

And a feud with the software giant Adobe, whose Flash video player is used on numerous websites but which doesn’t work on the iPhone, has also gone to the competition authorities.

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 that critics were underestimating the ferocity with which Apple’s fans will 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.”

But the terrible reception for the new iPhone comes at a tricky time, since rival phonemakers appear to have finally found a way to compete with Apple in the market for smartphones. Phones using a new software platform developed by Google, called Android, have won strong reviews and in New York there were even lines outside some stores yesterday when the new Droid phone went on sale.

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 £25 and Wall Street analysts speculated that Apple could offer free bumpers to people buying the iPhone 4.

What Apple wrote, and what it meant

July 2, 2010

Letter from Apple Regarding iPhone 4

Dear iPhone 4 Users,

The iPhone 4 has been the most successful product launch in Apple's history. It has been judged by reviewers around the world to be the best smartphone ever, and users have told us that they love it. So we were surprised when we read reports of reception problems, and we immediately began investigating them. Here is what we have learned.

To start with, gripping almost any mobile phone in certain ways will reduce its reception by 1 or more bars. This is true of iPhone 4, iPhone 3GS, as well as many Droid, Nokia and RIM phones. But some users have reported that iPhone 4 can drop 4 or 5 bars when tightly held in a way which covers the black strip in the lower left corner of the metal band. This is a far bigger drop than normal, and as a result some have accused the iPhone 4 of having a faulty antenna design.

(What it meant No 1. With masterful understatement, Apple explains 'some users' are unhappy. This sentence barely does justice to the fury of customers who have bought a phone, which, in its primary function, is anything other than smart. Apple acknowledges, but does not confirm, suspicions that the device has 'a faulty antenna design'.)

At the same time, we continue to read articles and receive hundreds of emails from users saying that iPhone 4 reception is better than the iPhone 3GS. They are delighted. This matches our own experience and testing. What can explain all of this?

(What it meant No 2. Here, having made clear the iPhone4 is still popular with large numbers of customers, Apple indicates that it has found the source of the low reception reported by 'some users'.)

We have discovered the cause of this dramatic drop in bars, and it is both simple and surprising.

(What it meant No 3. Apple's explanation is 'surprising': those big falls in reception are because the reception shown on the phone was never there in the first place. A software fault; not the hardware.)

Upon investigation, we were stunned to find that the formula we use to calculate how many bars of signal strength to display is totally wrong. Our formula, in many instances, mistakenly displays 2 more bars than it should for a given signal strength. For example, we sometimes display 4 bars when we should be displaying as few as 2 bars. Users observing a drop of several bars when they grip their iPhone in a certain way are most likely in an area with very weak signal strength, but they don't know it because we are erroneously displaying 4 or 5 bars. Their big drop in bars is because their high bars were never real in the first place.

To fix this, we are adopting AT&T's recently recommended formula for calculating how many bars to display for a given signal strength. The real signal strength remains the same, but the iPhone's bars will report it far more accurately, providing users a much better indication of the reception they will get in a given area. We are also making bars 1, 2 and 3 a bit taller so they will be easier to see.

We will issue a free software update within a few weeks that incorporates the corrected formula. Since this mistake has been present since the original iPhone, this software update will also be available for the iPhone 3GS and iPhone 3G.

(What it meant No 4. Apple slips in the extraordinary claim that this fault has been present in all iPhones since 2007: all 50 million of them. If so, why didn't it fix it earlier and why do iPhone4 users say the problem is worse?)

We have gone back to our labs and retested everything, and the results are the same — the iPhone 4's wireless performance is the best we have ever shipped. For the vast majority of users who have not been troubled by this issue, this software update will only make your bars more accurate. For those who have had concerns, we apologise for any anxiety we may have caused.

As a reminder, if you are not fully satisfied, you can return your undamaged iPhone to any Apple Retail Store or the online Apple Store within 30 days of purchase for a full refund.

We hope you love the iPhone 4 as much as we do.

Thank you for your patience and support.

Apple

Criticism of iPhone 4

"I assume there is no fix then. If this is legit, I have lost all respect for Apple and just want to go back to Verizon and get a nice Android phone. [...] I have bought just about every Apple product made in the last 20 years and this is the first time I am ashamed to be a Mac fan. This is just sickening."

BGR reader's email to an Apple engineer, posted on BGR, 1 July.

"The kind of non-apology apology that politicians give out when they're caught making outrageously offensive comments about a major ethnic group."

Mitch Wagner, Computer World, on Apple's response to the signal loss criticism, 2 July.

"Unless a lot of smart people are suffering from mass hallucination, I don't see how the software glitch Apple detected (completely) explains what's going on here. And Apple, being full of smart people itself, understands that. Right?"

Harry McCracken, Technologizer, on Apple's explanation for the fault, 2 July.

"It's a design flaw, Apple. Sure, it's not as bad as the exploding gas tanks on the Ford Pinto, but an iPhone without the phone is nothing but an overly-expensive iPod Touch."

Jacob Friedman, The Next Web, 2 July.

"The latest Apple iPhone has been riddled with issues since its launch, such as yellowing screens, broken displays and the now infamous signal loss."

Luke Johnson, T3, 9 July.

"It's like the AT&T dead zone has been extended with this new phone."

Apple co-founder Steve Wozniak discusses the signal loss in an interview with Henk van Ess.