Recalling iPhone 4, while unlikely, could cost Apple $1.5 billion, analyst says

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A decision by Consumer Reports not to recommend the iPhone 4 because of reception issues could tarnish Apple Inc.’s reputation. Credit: Alan Diaz / Associated Press

The possibility that Apple’s new iPhone could have a faulty antenna has fueled speculation that the popular phone could be recalled, and one analyst has pegged the potential cost at $1.5 billion. Recall rumors were prompted by Consumer Reports’ announcement Monday that it couldn’t recommend the handset because its tests confirmed large drops in reception when the phone is held in a certain way.

When Apple Inc.’s shares slid more than 4% early Tuesday, Bernstein Research analyst Toni Sacconaghi issued a report saying that although a ‘full product recall of the iPhone 4 would be highly unlikely,’ the occurrence would end up costing Apple $1.5 billion or 3.5% of its total cash balance.

‘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 said in the statement.Apple sold a record-breaking 1.7 million iPhone 4s in the first three days of the product’s launch last month, but it received immediate complaints from consumers that the device dropped four or five signal bars when holding it near the bottom left corner.

The new iPhone’s antenna was designed for the first time to have a steel band that wraps around the device. The Cupertino, Calif.-based company initially said a drop in signal was normal when holding any mobile handset but later issued a statement saying the problem was due to an error in displaying the signal-strength bars in all four of its phone’s models.

It suggested users could avoid the issue by either not holding it in that particular way or purchase a case, or ‘bumper,’ which runs around $30 each.

Sacconaghi said Apple should issue free bumpers to all of its current iPhone 4 users and future purchasers, which he estimated would cost the company $1 or less per unit.

‘While it would force Apple to ‘acknowledge’ a design issue with the iPhone, we believe that consumers are increasingly aware of the antenna issue, and remedying it rather than dismissing or ignoring it appears most appropriate,’ he said.

Apple did not return phone calls or e-mails seeking comment.

After Sacconaghi finished scolding the company for its lack of transparency, he ended the report with some encouraging words:

‘We believe that the antenna crisis will either pass or, more likely, that Apple will address it directly.’

-- Kristena Hansen