The only thing more surprising than the iPhone price drop was Jobs’ next-day backpedal.  “Here you go, minions,” he seemed to say. “Here’s a hundred bucks for you to use in any of my illustrious stores.”

Ahem…Steve?  Can I get that other hundy you just pocketed?  Or are you suggesting that I’ve been assessed a $100 penalty for buying the phone on time?  Doesn’t that seem a little extreme, dude?

Steve Jobs gave his entire fan base the middle finger yesterday, and I can only celebrate the fact I haven’t bought a phone from him. 

But aside from that, if I’m an Apple shareholder, I’m a little concerned right now.  Forget the hoopla and emotion surrounding what has been, for Apple, a shockingly bad two days.  Sift through the smoke and you can finally get a glimpse of something Steve has done a spectacular job hiding: Someone lifted the back curtain at Moscone Center as the crowd was getting up to leave, realized the mistake, and quickly dropped it.  Yet briefly revealed was a pile of garbage and muck no one had imagined was there. 

So let’s speculate on a very basic level, adapting Toyota’s famed “Five Why’s” to get to some kind of answer about the events that transpired in what has been a remarkably strange week in Cupertino.

1) Why would Apple drop the price of the phone?

For four possible reasons: a) it’s underselling at the pace they envisioned; b) the margins are wide enough to easily accommodate a price reduction; c) because they thought the news would go over well and spark more purchases; or d) because after introducing the iPod Touch, a device that seems to compete directly with the iPhone, they had to re-price the phone to compete with the new iPod.

If the answer is (c), sell your Apple stock right now.  Steve Jobs has been assassinated and replaced by Dick Cheney.  We’ll assume this one is impossible.

If it’s (b) then Apple thought (c) was possible, and that early iPhone adopters wouldn’t urinate on Steve Jobs’ burning house to stop a fire when they heard the news.  While (b) is more plausible than (c), Apple has simply made far too many savvy moves over the years to assume they would do something so stupid.  Not to mention, as far as I can tell, the iPhone buzz was still in full Ludicrous Speed two days ago (put Spaceballs in your Netflix queue if you don’t know what I’m talking about).  What would be the point of capitalizing on those wide margins so soon?  Answer: no point at all.  Option (b) is impossible.

Option (d) is something The Macalope suggested in a blog called Crave yesterday.  At first glance it makes sense.  But think it over a little more and the rationale is flawed.

In order for (d) to be true – that is, to assume the iPhone needed to be repriced to compete with the iPod Touch – you’re essentially saying that the iPod Touch was conceived, designed, produced, and priced within the last two months.  You’re saying that Apple spent all of their resources over the 12 months leading up to June on the iPhone, then began working on the iPod Touch in July and realized somewhere just before September 5th, “You know what?  This iPod Touch might cannibalize sales of the iPhone!  We need to reduce the price of the phone in order for the two to compete!”

Come on.  It’s impossible.  The iPhone/iPod Touch plans have been in development for ages.  The technology for the devices was created simultaneously.  Knowing the iPod Touch was going to launch two months after the iPhone, don’t you think they knew the devices were going to be similar, and therefore require similar pricing?

Which leaves (a): Inside Apple, sales of the iPhone have disappointed.  I’m not saying the device itself has disappointed.  The numbers have. 

Which leads to #2…

2) Why hasn’t the iPhone sold as well as Steve Jobs thought it would?

Because none of us, until this week, knew that the phone wasn’t selling on pace, we can only look at things from his perspective, and clearly he thinks the reason is that the phone was overpriced.

CNET Editor-at-large Brian Cooley made a great point about that yesterday on CNBC: We just saw a 40% price drop on a product that launched two months ago…AND…it did so without the announcement of a new iPhone model, nor any major or minor upgrades.  This isn’t only unprecedented for Apple, it’s unprecedented for any company that has ever made and sold a product. 

So because Steve thinks the iPhone was overpriced in the first place…

3)  Why was the iPhone overpriced in the first place?

The answer might not be as simple as you think. 

On one hand studies show that high prices don’t scare consumers so long as the product is perceived as being unique and special.  It’s the reason women pay $3,000 for a dress that looks strikingly similar to one they could buy at Forever 21 for $40.  The brand, the fabric, the designer, or all of the above, are perceived as being unique and special.  The product is worth the astronomical premium. 

Apple hoped to achieve the same thing with the iPhone and we thought they had succeeded.  We thought sales of the iPhone were at least meeting expectations.

Would sales have suffered if the cost had been $200 cheaper from the start?  I can’t imagine that being true.  Sure, there were going to be shortcomings, especially for Round 1, but the overall quality of the phone was never in doubt.  We knew the phone was going to be unique and special, and for the most part it was.  If it had been $200 cheaper, every other phone in the market with a $300 tag would be in trouble as the entrant of a more dominant force – the iPhone – would mandate price drops for competitors. 

Instead the price seemed reasonable: $500 for the best phone on the market.  The best phone should have the highest price.  We’re accustomed to that line of thinking.

But you can now throw all of your preconceptions about the iPhone out the window.  It was overpriced.  We aren’t buying it as fast as Apple needed us to.  I don’t care what the public numbers say…behind closed doors they expected more. 

The only reasonable answer is that Steve Jobs thought the iPhone was going to be worth $200 more than the 16GB iPod Touch.

Think about that pricing for a second: An 8GB iPhone costs $399, the same price of the new 16GB iPod Touch.  If I’m an early iPhone adopter, the $499 I paid for the phone and the $100 store credit is making me feel more ripped off than I already was.

4) So why did he think he could price the iPhone so high?

Steve Jobs must’ve believed demand for the phone was high enough, and that enough people were ambivalent about their carrier, that a mass migration to AT&T was sure to take place.

But in contracting with AT&T, the iPhone lost a lot of potential customers.  Yes, some migrated.  Others sat tight for two reasons: 1) Why pay $600 for the first generation of a device sure to have flaws?  And 2) Why migrate to AT&T, a carrier notorious for all-around shoddy service?

The first reason is typical of a new device.  But it wouldn’t have been as bad had the iPhone gone with a more reputable carrier like Verizon (which we now know didn’t happen because Verizon, nor any other carrier, was willing to give Apple the lush deal that AT&T did).

5) Why did Steve Jobs go with AT&T?

No need to rehash the company line here.  We know Apple’s public explanation.

The private explanation is one that even Apple might be having trouble reconciling at the moment.  The deal AT&T provided was obviously sweet, and Apple bit.  But they also seem to have underestimated the loyalty people have to their carrier – people, that is, that are content with their service.

Will a $200 price cut be the answer?  It might help.  There’s a large cost, after all, with breaking your carrier contract, and Apple’s now essentially footing that bill for you.

But today I feel like I might sit tight on the iPhone for a while longer.  Who knows when the price might drop again?  Plus there’s that new iPod Touch, which looks awfully nice.  And with the ability to keep my carrier and benefit from Apple’s new technology without switching services, the reasons for switching are thinner yet again.

*****

The bottom line is that a lot of hyped competitor products are on the horizon, and the mobile market is different than the computer and MP3 device spaces, both of which Apple has dominated.  In fact the MP3 device market is quickly becoming irrelevant: We now expect and demand our phones and portable music devices to go together, something that makes the release of the iPod Touch more than a little curious. 

In order to compete and dominate this market (and remember, Apple’s own stated goals for the iPhone are enormous – almost unreachable, in fact) the company needs iPhones in people’s hands.  So long as I’m sitting here with my Verizon contract, I’m open to competitors, and something we’ve long come to rely on from the mobile industry is that technology standards are produced by some heavy hitters. 

In other words the iPhone is a great product, no doubt, but Nokia, Sony, and Google, to name a few, are certain to produce something at least as compelling.  And eventually so will everyone else. 

As long as Apple is having trouble converting consumers to AT&T, the iPhone is vulnerable.  The doubters (or “The Clowns,” as The Macalope called them) have been pointing this out for months.  But until yesterday, until Steve Jobs acknowledged a problem more ungraciously than we ever imagined he could, the doubters and clowns were hushed by the hype.

Turns out Steve Jobs might just be human, Apple might just be a company, and the iPhone might just be a phone. 

Scott Goldberg

Post-publishing note:

In case you were wondering, UBS reported on Friday that the Apple payback will cost the company about $100 million in the current quarter.  Just another dash of salt on the wounds inflicted this week.