Apple Cuts iPhone Price Ahead of Holidays

Apple unexpectedly cut the price of its iPhone Wednesday, claiming that it was seeking to broaden the market for the popular but expensive phone for the Christmas season.

A new iPod model has touch-screen controls and built-in Wi-Fi.
Apple also introduced a new digital music player modeled after its iPhone and struck a wireless music distribution deal with the Starbucks coffee chain. Apple, which rarely drops the prices on its products, cut the price of its 8-gigabyte iPhone by $200, to $399.

Steven P. Jobs, the chief executive, said in an interview after the announcement that Apple would have been able to hit its publicly declared target of a million iPhones sold in the United States by the end of this month, even without a price cut.

“We’re a high-volume manufacturer, and we’re pretty good at getting costs down,” Mr. Jobs said. “It’s very clear we have a breakthrough product on our hands, but it’s also clear that many can afford it, some can’t. We’d like to make it affordable to even more folks going into this holiday season.”

Investors appeared to interpret the announcement negatively. Apple’s stock fell more than 5 percent, closing at $136.76, and most of the loss came during and after Mr. Jobs’s presentation Wednesday morning.

“My suspicion is that they got to 750,000 really quickly, and then it started to slow down,” said Van Baker, an industry analyst at Gartner Group.

The iPhone was first sold on June 29. A number of recent analysts’ reports have noted that it is selling well and is, indeed, outselling its smartphone competitors. But Mr. Jobs said that if the company had waited past the Christmas buying season to reduce prices it would have been forced to delay for another year reaching a broader consumer market. “We’re feeling like being more aggressive,” he said.

Chetan Sharma, a telecommunications industry analyst based in Issaquah, Wash., said, “They’re trying to get the next demographic to bite into it.” Another breakthrough Apple product, the original Macintosh, initially sold briskly in 1984 and then stalled abruptly. The Macintosh market did not regain its luster until 1986 with the introduction of the Macintosh II. Apple’s market share among computer makers remains small, in part because of the premium price it places on its Macs. (Apple’s market share in music players has not suffered a similar fate, however.)

On Wednesday, Apple executives insisted that the price cut had been planned long ago and that the strategy had been conceived in part to keep the iPhone’s pricing in line with its new iPod Touch, a music player that looks like the iPhone but lacks the phone-calling ability. The sharp price cut, however, suggested that even Apple, which has long lived in a pricing bubble insulated from other personal computer makers, is not immune from the brutal pressures of the cellular phone business.

Mr. Jobs said the company was making a “total refresh” of the iPod line, and he demonstrated a series of new features that showed how Apple was turning the music player into a hand-held computer.

Mr. Jobs displayed the new flagship iPod Touch, which will sell for $299 for an 8-gigabyte model and $399 for one with twice the capacity. Slightly thinner than an iPhone, the new device has touch-screen controls and a built-in Wi-Fi antenna that allows it to connect directly to the Internet. It also has a browser, which makes it more of a hand-held computer than any other music player.

Users will be able to connect to a new iTunes Wi-Fi store where they can download songs directly to their music players without having to connect to a computer.
Another feature of the iPod software will be the ability to alert a user entering a Starbucks coffee shop to the music being played there. Then, a tap on the screen will download the song from iTunes.

Howard Schultz, Starbucks’s chairman, said Starbucks stores in the United States are being equipped to manage this process. He said that stores in Seattle and New York City would have the ability by Oct. 2 and that other stores across the country would get the service over the next two years.
In other announcements, Apple introduced a new iPod Nano, chunkier than before, but with a bigger screen for viewing video. Mr. Jobs said he still hoped that Apple could salvage its relationship with NBC, which had said it would not sell its programs on iTunes. The two companies could not resolve differences over pricing.

“The other networks are thrilled,” Mr. Jobs said, “because we actually promoted NBC shows a lot last year and we were getting ready to promote them this year for the new season. Unfortunately that’s not going to happen. I think its a loss for both us and NBC, and I hope it gets put back together. But I don’t think that selling TV shows for a lot more than we are makes any sense. You can watch them for free on TV.”