NEW YORK (Reuters) - Apple’s (AAPL.O) steep price cut on the iPhone, just two months after launch, is a sacrifice that may pay dividends if it boosts holiday sales and paves the way for a successful European debut.
Chief Executive Steve Jobs announced on Wednesday a surprisingly steep $200 (99-pound) price cut for the 8-gigabyte iPhone, which had made a high-profile U.S. debut at the end of June at $599. Jobs also said Apple would scrap the 4-gigabyte model, which had cost $499.
Analysts said Apple dropped the iPhone’s price to make room for a more advanced model of the touch-screen phone in Europe, which is expected to launch with third-generation (3G) high-speed Web links. The current model only supports 2G speeds.
“By reducing the pricing on the 2G version, it does provide them with the flexibility in the next few months to introduce a 3G model,” said Oppenheimer analyst Lawrence Harris.
Jobs said he expects the iPhone to launch in Europe in the next quarter but gave no more details.
News of the price cut pushed Apple shares down 5.13 percent as investors interpreted the size and timing of the move as signs that demand for the gadget may not have lived up to the hype.
“I think it’s clearly a sign that the velocity of the sales volume has probably dropped to a level they’re not comfortable with,” said Gartner analyst Van Baker.
“We expected a price drop but I can’t say we expected this aggressive a price drop. It’s the equivalent of Apple going all in on a poker game,” he said, adding that Apple investors were likely worried about the effect on iPhone profit margins.
But other analysts said the move will spur faster sales of the gadget during the critical winter holiday shopping season, making the iPhone more competitive with other smart phones and helping its service provider AT&T (T.N) win new subscribers.
“Clearly the price cut should be positive for sales of the device, which should benefit AT&T,” said Robert W. Baird analyst William Power, adding that the price cut may help AT&T beat his fourth-quarter customer growth estimate of 1.9 million.
Gene Munster of Piper Jaffray also supported Apple’s price strategy. “Apple is investing iPhone profit dollars over the next few quarters in order to be a legitimate player in the phone market,” he said in a note to clients.
The music-playing iPhone competes with devices from companies such as Nokia NOK1V.HE, Motorola MOT.N, Samsung Electronics (005930.KS), LG Electronics (066570.KS), Palm PALM.O and Research In Motion RIM.TO.
Since about 85 percent of U.S. mobile customers spend $100 or less on their cell phones, the new iPhone price is still beyond the reach of many consumers.
But the price cut will pressure AT&T’s rivals to offer deeper discounts on their advanced phones, analysts said. AT&T is the exclusive U.S. cellular service provider for the iPhone.
The iPhone is “clearly in the high end but it’s not in the upper, upper stratosphere. It prices it more in line with some of the other smartphones out there,” Power said.
AT&T, Verizon Wireless— which is a venture of Verizon Communications (VZ.N) and Vodafone Group Plc (VOD.L) — and Sprint Nextel (S.N) usually shoulder part of the cost of cell phones to lure customers into signing two-year contracts.
“The industry has already been hyper competitive in terms of subsidy costs. This isn’t going to help and could also put pressure on sales and marketing expenditures,” Power added.
AT&T has said it does not subsidize the iPhone. Spokesman Mark Siegel said on Wednesday he expects the price cut to boost sales. “We’re very pleased with the response to the iPhone so far and we expect this new pricing by Apple to be even more popular,” said the AT&T spokesman.
The iPhone outsold all smartphones in its first month of sales according to research group iSuppli.
Additional reporting by Scott Hillis and Duncan Martell in San Francisco