The truth about the $100 iPhone rebate

For the purposes of this post, “rebate” is synonymous to “credit.”

If you have been keeping up with the news lately, you probably know that Apple recently dropped the price on the iPhone by $200 less than 3 months after launching the product, angering a lot of consumers who felt they were duped by Apple when they bought the product at a premium price. The day after Apple announced the price drop, Steve Jobs announced that all early adopters would receive a $100 credit that they could use in the Apple store. There has been a lot of talk about this move since it is not typical for a company to offer anything to early adopters after a price drop. Some have speculated that Apple is the cuddly-teddy-bear of corporations, others have insisted that they would have thought so even without the rebate. Unfortunately, no one in the tech industry knows enough about money to understand the real reason for the rebate; for one thing, it’s not about the customers. It’s about the investors.

Apple’s stock (which trades under the ticker symbol AAPL) has been moving a lot lately, mostly due to the hype surrounding all the new products and Apple’s foray into a new market (cellphones). Believe it or not, Apple is a publicly-traded company and all publicly traded companies are very much responsible to their investors. Whenever you find yourself wondering, “why did company X do this thing, which is obviously not ideal for consumers,” you can bet your teeth they did it for the investors.

One of the problems with all the hype surrounding Apple’s products is that it promotes a lot of buying and pushes prices up but doesn’t guarantee that the company will make a big profit. In this case the stock risks becoming overvalued and if Apple doesn’t follow up with the best results, people start selling and the price goes back down.

This definitely happened with the iPhone. The hype before its launch suggested that the iPhone would be in everyone’s hands after it launched and that it would upset the cellphone market, displacing competitors like Nokia and Research in Motion. In the past few months that the iPhone has been on the market, it has definitely sold very well and proved to be a successful product, but it did not quite live up to the hype. When it comes to investors, living up to the hype is far more important than being successful; if you don’t live up to the hype, you are overvalued and your stock risks falling.

I’m convinced that Apple knew this was the case when they dropped the prices on iPhones; the iPhone has been selling well but it’s mostly just saturated the market of iProduct-lovers and the real test stands as the rest of the consumer population enters the holiday season and starts considering which gadgets to buy. Now the iPhone has to compete for the attention of users who aren’t so cozy to Apple products and bringing the price down to $399 is a very good way to do it.

Unfortunately, however, the iPhone is not Apple’s only product and the latest announcement regarding the iPod line is actually a threat to the iPhone’s performance; since Apple announced a new iPod Touch that offers almost all the features of the iPhone without the lock-in to an AT&T contract, investors are concerned that Apple is competing with itself. And they should be! The iPod Touch is a much more attractive gift item than the iPhone, since most consumers don’t buy new cellphones until their contract period is over.

On top of all this, the new iPod Nano is disappointing, and NBC recently removed all their content from iTunes. So Apple has two products that are competing with each other, another product that is unattractive, and a service that is going through a rocky situation with big media companies. Regardless of whether the company profits well from consumers or not, this is no way to make investors happy.

Enter the $100 rebate. Why not just give consumers $100 cash? Simple: $100 rebates go back to Apple when consumers use them to purchase products. And, considering that many products cost more than $100, it’s really a $100 coupon. Plus, these are the early adopters, the iProduct lovers, the ones who stood in line for hours to get an iPhone. There’s a really good chance they will use their rebate and buy something nice with it.

Now, let’s consider one thing: Apple has excluded iTunes music from the rebate. Can you guess why they did that? Compare a song purchase to, say, a product purchase like a Macbook. A song purchase is a dead-end sale; the user has the song and that’s all there is to it. A Macbook purchase is a platform sale; you are giving the consumer a product that opens the door to more products. It’s very likely the consumer will buy accessories & software alone with their Macbook, meaning more money will come back to Apple. In the long run, by discouraging “dead-end” purchases, Apple will most likely make profit from all the consumers who exercise the rebate.

Like I said, it’s a $100 coupon that encourages people to shop more.

And I’m convinced that investors know this, and they know that Apple has made at least one smart move: the $100 rebate has generated buzz, increased customer loyalty, and ensured that most of 1 million consumers will be shopping for Apple products. So, it has nothing to do with “Apple loves their customers,” though that may be true. It has everything to do with “Apple wants investors to love their stock.”

That’s a stock market lesson for you right there. Feel free, however, to disagree, and share your thoughts too.

disclaimer: I know there is a certain degree of conjecture and subjectivity in this post; some might argue that the iPod Nano is a great product, for example. I don’t claim to be a serious analyst or to be 100% correct, but I hope that this conjecture won’t get in the way of the overall conclusion, which I do believe has merit.