First, the reviews were mixed. At that retail price and with that level of hype, the critics were going to be tough but a raft of concerns from delayed activation and sluggish email (AT&T's responsibility as the exclusive network provider) to feature shortfalls began to dampen marketplace enthusiasm.
I don't really care whether professor Quelch thinks the iPhone is a good phone or a bad phone, or even if it is good or bad for any particular use-case. Instead, I am pretty annoyed at his sloppy analysis of the iPhone launch. My first criticism is about language, and his use of the word "hype" regarding the marketing activities surrounding the launch. I am perfectly fine with his use of the word "promote" (earlier in his article), but nearly all of the definitions of "hype" suggest some form of trickery, deception, or dubious methods. When I hear "hype", I think "hyperbole", which is an "obvious and intentional exaggeration". I don't think I am picking nits here, because the conclusion of his article points directly to this:
Hype can hurt stock prices and investor confidence when expectations are not met.
Almost every product is advertised with this "obvious and intentional exaggeration", and I find it tiring, even though I understand the reasons. If I pay attention to an ad, I am looking for clues as to whether the product being advertised might be suitable for my needs; when hyperbole is routinely used, I cannot tell.
The striking thing about the iPhone ads was that they engaged in no hyperbole whatsoever. They showed someone using the phone to perform a series of tasks, in real time. There wasn't a cut, or a special effect, or a "your mileage may vary". In fact, any iPhone user could duplicate any of the ads on their own, with no special training. When you perform an experiment that anyone, anywhere can reproduce and get the same results, this is called science. To me, this is the antithesis of hype.
In the same spirit, and moving on the the rest of my complaint with Prof. Quelch, I don't think there was a single feature or capability that was promised that was not delivered. Anyone who was unhappy with their iPhone shouldn't have been surprised. We routinely expect companies to mislead us about the performance of their product - usually around measures that are hard to pin down, like gas mileage or battery life. But even in this area, I hear no one complaining that the iPhone doesn't live up to its published specifications. All the complaining I heard was that the iPhone didn't have a feature that the complainer wished it had.
Just to stay on track, my points so far are that 1: the iPhone was not hyped, and 2: the iPhone did not disappoint expectations.
As for the price cut - every cell phone ever made (that may be a bit of hyperbole) has gone through the "rapid skimming" marketing model, where it is launched at a high price to capture high margins from early adopters, and then is reduced in price to capture additional revenue farther down the demand curve. The only unusual thing about the iPhone was that the price cut came so soon after launch. This might mean that the initial price was set too high, or it might mean that Apple and AT&T sold so many phones into the early adoptor market in the first few weeks that they could now target more price sensitive buyers.
The other thing that was unusual about this situation is that normally, a cell phone manufacturer would come out with a new phone, which would push down the price of the previous market leader. If Apple had done this, people still might have been surprised by how fast it happened, but not surprised at all that the old phone had to be discounted in the face of the newer phone. The unusual thing is that the iPod Touch, which is not a cell phone, is still a competitor to the iPhone. Many customers who were considering a iPhone might switch to the new iPod Touch. Apple probably made some rational calculations about how much an iPhone customer was worth to them compared to an iPod Touch customer, and adjusted the price of the phone to match. When new products are released into the market, the demand curve for the old product shifts.
Apple stock was at $144 on September 4, the day before the launch of the iPod Touch. It did dip on the launch news, but by September 25, it was $153. That is a 6.25% increase in 20 days. Annualized, that is equivalent to a 114% increase. The NASDAQ rose less than 4% during that same period. I won't go into the calculation here, but even accounting for this increase, and Apple's sensitivity to the market (beta), this is a real gain by Apple.
If I were doing an event study on this, my conclusion would probably be that the market reacted to the news as if it were bad news, then over the next couple of weeks figured out that it was actually good news. Benjamin Graham used to say that in the short term, the stock market is a voting machine; but in the long term it is a weighing machine.
So let's revisit our good professor's conclusion:
Hype can hurt stock prices and investor confidence when expectations are not met.
My assessment is that Apple did not hype their product, did not fail to meet expectations, and except for a short-term blip (less than 20 days), did not have their stock price or investor confidence hurt. The truth is, I agree with professor Quelch - hype is a dangerous thing. I just think he picked a horrible example in Apple and the iPhone launch. And from Harvard, I was hoping for better.
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