Apple Hits Hard Road

Investors have received mixed signals about consumers' interest in the iPhone this week. Apple CEO Steve Jobs said the price cut doesn't reflect slackening demand but is instead a move to juice sales during the holiday season. He also said the company is on track to sell 1 million phones this month.

Earlier in the week, market tracker iSuppli said that iPhone unit sales should reach 4.5 million this year as Apple launches the device in Europe. iSuppli also said that unit sales should reach 13.5 million in 2008, ahead of Apple's target of 10 million.

Piper Jaffray analyst Gene Munster expects Apple to exceed near-term iPhone sales forecasts and to reach a broader range of consumers with its new price.

But this strategy invokes worrisome parallels with Motorola, which has suffered badly after aggressively discounting its Razr cell phone. The Razr took years to develop and was hailed as the sleekest, most innovative cell phone when it debuted in 2004. But successive price cuts aimed at picking up market share undercut the Razr's cachet as well as Motorola's profitability.

Motorola twice warned this year that it would miss earnings targets as its cell phone operation has gone into the red.

Apple should be able to avoid Motorola's fate if future iPhones are clearly superior and innovative devices, says Robert Stimpson, portfolio manager with Oak Associates, an Apple investor. Motorola stumbled, he says, by failing to provide compelling innovations to the Razr.

But this doesn't necessarily help Apple avoid another wrinkle in the Motorola analogy. Inexpensive Razrs cannibalized sales of the phones that Motorola hoped would replace it. If Apple enthusiasts snap up cheap iPhones rather than new models that come out in the future, Apple may be forced into the same cost-cutting trap.

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