Apples & Herb

I love Herb Greenberg.

I may not always agree with everything that he writes, but the guy is a genius, fully deserving his status as one of financial journalism's rock stars.

However, he got a little sloppy in taking Apple (Nasdaq: AAPL) to task last night. I'm here to try to see if I can mop things up.

"Imagine if you just bought an iPhone," begins his blog entry.

He isn't necessarily referring to the $200 price drop on the eight-gigabyte iPhone, now priced at $399, that CEO Steve Jobs announced yesterday. Instead, Greenberg is talking about the introduction of the $299 iPod touch -- essentially a slightly slimmer eight-gig iPhone, without the phone.

"In other words," writes Greenberg, "the best part of the iPhone for a hundred or two hundred dollars less than the iPhone; a few thousand dollars less, if you include the total cost of the contract required with the phone."

He then recites an email from a skeptical money manager, touching on the same points. "Who in their right mind would want an iPhone when you can get this," wonders the unnamed money manager:

If I was AT&T/[Cingular] I would be furious. Heck, if I bought an iPhone I would be furious because I just paid $2,000 [including the contract] for a ... phone when I can get this thing for $299 and keep my old cell phone ... I wonder how many sudden iPhone returns they start getting now ... talk about buyer's remorse.

Are you buying all of this? It sounds pretty damaging to Apple, until you begin poking at the holes in their arguments.

That's no way to gnaw an Apple
First, let's get the new pricing straight. The iPod touch has a $299 model with 8 gigs, and a $399 model with double the capacity. The "hundred or two hundred dollars less" argument is inaccurate. It's $100 at the most.

It's a petty knock. When I really start flipping my lid -- and I'm not even a Machead, though I spent some time drooling inside an Apple store over the weekend -- is when they begin to pile on the price of two-year contract as if it's incremental to their argument.

Yes, the basic iPhone plan will run you $60 a month through AT&T (NYSE: T). It includes unlimited Web and email data, as well as 450 rollover minutes, another 5,000 weekend minutes, and 200 text messages. Two years of paying $60 a month (plus taxes) and a $399 iPhone purchase will run you into the $2,000 ballpark -- but what's the alternative? Buy the $299 iPod touch, and then tie a pair of Dixie cups to a string? It seems silly make a comparison without factoring the costs of maintaining a stand-alone wireless account with a second provider?

Apple's plan isn't the cheapest, but it's reasonable. Wireless discounters like MetroPCS (NYSE: PCS) offer more attractively priced plans, but even MetroPCS doesn't have a plan for less than $45 a month that includes unlimited email and Web data.

"I can get this thing for $299 and keep my old cell phone," writes the money manager. Exactly. Even if you can shave a few bucks a month on a different wireless plan, who wants to be lugging around a pair of gadgets when one will do?

Buyers remorse? I can see someone feeling a bit stiffed at the $200 iPhone markdown, especially if they camped out two months ago to be an early adopter. However, now that Apple expects to ship its millionth iPhone later this month, it's all about reaching the masses.

"If I was AT&T/[Cingular] I would be furious," wrote the money manager.

Sure. If Apple marks down the hardware by 33% to open up the floodgates brimming with potential wireless subscribers, I'd be furious, too -- furiously writing up new orders.

Hello, this is AT&T. We are furious, Apple. Lower iPhone prices, along with the new ringtones store and the ability to purchase music and videos on iTunes through Wi-Fi will only drive more business our way. How dare you?

Pushing your iLuck
The iPod touch is an unshackled iPhone without the cell-phone circuitry. The market may have unenthusiastically marked down shares of both Apple and AT&T yesterday, but why do some people feel that the iPod touch will be an iPhone killer? I don't see it that way at all.

I think the iPod touch will be a gateway drug for eventual iPhone users. iPod owners will buy the sleek new model. They will become intimately familiar with the interface and its features. When the time comes to buy a new wireless handset, it will be the easiest decision they ever make.

You never know what the future may bring. Maybe Google (Nasdaq: GOOG) rolls out an ad-supported Gphone, as many have speculated for months. Maybe wider Wi-Fi blankets turn companies like Vonage (NYSE: VG) and eBay's (Nasdaq: EBAY) Skype into new power brokers in an already-crowded cell-phone space. Predicting the future is as fun as it is flawed.

However, for now at least, I'm confident in both Apple's iPhone strategy and my ability to mop up a rare Greenberg oversight from last night. You can't even begin to predict the future if your assumptions of the present are incorrect.