Apple's Intentional iPhone Destruction: Illegal

28 Sep 3:14am
Posted by ToddSullivan
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Apple's (APPL) quest to keep total control over its iPhone seems to have caused it to break the law.

Ever heard of the Magnuson-Moss Federal Warranty Act? It would seem those at Apple's HQ have not either but when they put out an iPhone update this week that disabled hacked iPhones, they broke this law.

The site Phone News.com details how Apple did do. The act says that Apple cannot void a warranty for a product with third-party enhancements or modifications to their product. The only exception to this rule is if Apple can determine that the modification or enhancement is responsible damaging the product in question. Since it was Apple that intentionally caused the damage to the iPhone, the phones are still technically still covered under the warranty. Apple has a problem because they are refusing to honor the warranty on the hacked phones.

Once ownership of the phones was transferred from Apple to the buyer at purchase, the new owners have the right to do whatever they want with the phone. Kind of like buying a car and customizing it. Now, if your customization of the car (phone) causes it not to work, the auto maker (or Apple) need not honor the warranty, but, and this is a key point, the car maker (or Apple)cannot come out and take the transmission out of the car because they do not like the modifications you made. This is essentially what Apple did. They said "if you change the phone, we will break it on you". Illegal.

If nothing else this come as another PR pothole for Apple who has gone from wearing the lovable underdog label to corporate bully in the course of a few weeks. First there was the unexpected (not to ValuePlays readers) $200 price drop on the phone less than 3 months after it's release that had those who waited in lines for two days to get the initial phones outraged. Apple attempted to sooth them by offering them a $100 rebate which still leaves them $100 short but it was better than nothing.

The iPhone hype has subsided and sales are not as hot as Apple would like them. they are running short of their 10 million unit by the end of 2008 goal and negative press like this will not encourage those folks on the fence to make the plunge and pony up the $399 necessary to get one now.

Apple could miss a quarterly earnings expectation and still keep the aura around itself. The stock would take a hit but a good quarter following it would repair that. Expectations are way too high currently for the company and its products and it would seem Apple may be letting that guide its decision making process. If they alienate those who are buying it's products with moves like this that make them feel like the enemy, that damage will take much longer to repair.


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About

ToddSullivan

A Massachusetts based value investor, I look for companies whose current valuation is at a discount to their true value. When I purchase a stock, my typical holding period is several years. I consider buying a stock purchasing a piece of a business. I am confident once I make a decision to buy that eventually the market as a whole will recognize the true value of the business and value it accordingly. It may take 1 month, 6 months or a year, but if I buy it at enough of a discount to its true value my results will be (and have been) superior to the market as a whole. Of all the disparate investing disciplines, value investing has stood the test of time. The great investors of have all been value investors. Warren Buffett, Ben Graham, Bill Ruane (Sequoia Fund), Bill Miller and Wally Weitz, all have consistently outperformed the market for decades by using various forms of value investing. Currently I am a contributing writer to Seeking Alpha, Vinvesting.com, The Stock Masters and Value Investing News. Posts have been reprinted in The Wall St. Journal, Yahoo Finance, Google Alerts, Google Finance, TheStreet.com. 24/7 Wall St. and Topix.net.

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