By Philip Elmer-DeWitt
July 14, 2010

Not that big a deal, is their consensus. The market, naturally, ignores them.

On Monday, Consumer Reports decided it couldn’t recommend the iPhone 4. On Tuesday and Wednesday, analysts who track Apple (AAPL) offered clients their take on what it means for the company.

Morgan Stanley’s Katy Huberty saw it as a “PR problem that Apple needs to address to preserve the brand and loyal customer base.” Kaufman Bros.’ Shaw Wu noted that Apple still can’t build iPhone 4s fast enough to meet demand.

A Toyota-style product recall was seen as unlikely, despite chatter from a crisis management expert who handled the Monica Lewinsky affair for Bill Clinton, although RBC’s Mike Abramsky estimated that every week Apple waits adds another $200 million to its cost.

Several analysts suggested that offering users a free $29 Bumper would be a relatively painless solution. Piper Jaffray’s Gene Munster estimated the price of such a fix: $178.5 million, or 1% of Apple’s estimated operating income for fiscal 2011, something Apple — with $41.7 billion in the bank — could easily afford.

The market, of course, ignored the analysts’ advice. By Tuesday morning the stock had fallen $15.42 (6.3%) from Monday’s high, creating what some traders saw as buying opportunity in advance of next week’s earnings report. By the end of the day, shares had recovered some of the lost territory and closed at $251.80.

Below: Excerpts from the analysts’ reports.

Morgan Stanley’s Katy Huberty: “Antenna Concerns Need To Be Addressed”

We view this as more of a PR issue that Apple needs to address to preserve the brand and loyal customer base than a serious reception issue for most users. We don’t see a full product recall as likely but believe Apple would benefit from extending concessions to any customers experiencing issues and/or providing more details about how it can fix the problem in future production runs.

Barclays Capital’s Ben Reitzes: “Get an iPhone Bumper”

As users, we have experienced some issues w/call drops; however, we have found drops go away after attaching a bumper accessory, which is quite useful anyway. In our experience, concerns around product issues tend to be overblown – AAPL will issue a software update & also work on fixing the issue. To date, we have not seen any overwhelming evidence of iPhone 4 units being returned. We do not believe these issues will materially impact AAPL’s product momentum.

BMO Capital’s Keith Bachman: “iPhone Disruptions”

a) Based on interviews with 25 AT&T store reps, we believe that demand remains strong and returns have been few [see chart], and b) based on Asian supply chain checks, we do not believe that Apple has made cuts to production levels. Moreover, even if Apple were to give away bumpers to completely eliminate this problem, the financial impact would be minimal.

Kaufman Bros.’ Shaw Wu: “Growing Antenna Attention Could Create Risk”

We view this conclusion by CR as negative and could create an overhang. So far, in our supply chain and industry checks, we have not seen any change in build plans or demand patterns and thus we are not changing our estimates looking for 7.5 million iPhones in the June quarter and 40 million in C2010. In fact, our sources indicate that Apple is still having difficulty keeping up with strong demand due to screen supply constraints. Should this antenna issue become a bigger deal, there could be risk to our as well as consensus iPhone estimates.

J.P. Morgan’s Mark Moskowitz: “Negative Review of iPhone 4 Turns Up the Heat on Apple”

At this point, concerns around iPhone 4 reception do not appear to be impacting demand, but we think there are risks when a well-respected product rating agency such as Consumer Reports issues an unfavorable report. We continue to expect a fix from Apple, whether the solution is software or hardware-related. [By Wednesday, Moskowitz was a bit more concerned: “While we think it is somewhat premature to consider a recall to be impending, we believe there could be merit for one if a software remedy does not manifest. Asking a customer to use a bumper accessory is not a permanent or user-friendly fix, in our view.”]

Piper Jaffray’s Gene Munster: “iPhone 4 Issue Reaches Boiling Point”

One option for Apple is to give away Bumper cases it currently sells for $29. Assuming 85% of all iPhones sold over the next year are iPhone 4s and Apple gives a Bumper away to every iPhone 4 customer, we estimate the company would give away 36m cases at a $5 cost per case for a total cost of $178.5m (1% of Operating Income over that time period). A second is option is for Apple to do nothing; as we’ve mentioned, we estimate that only 25% of iPhone users are periodically affected by the issue, and Apple could weather the storm by letting the current demand for the iPhone speak for itself. The third option is a recall, which we see as a highly unlikely scenario given the issue is completely resolved with a case, which is a significantly less expensive solution for the company.

Citigroup’s Richard Gardner: “Buy on weakness”

While bridging two portions of the antenna with one’s hand on the lower-left corner of the phone does cause signal degradation, it does not typically result in dropped calls unless the signal from the cell tower is already weak. Excluding this issue, overall signal reception on iPhone 4 seems at least as good, if not slightly better, than reception on the iPhone 3GS.

RBC Capital’s Mike Abramsky: “iPhone 4 Antenna Issues — Thoughts and Possibly Scenarios”

We view related weakness around this issue as a buying opportunity, given (1) we believe Apple may inevitably do what is necessary to correct the problem and apologize; (2) while the fix may come at some cost, Apple can easily afford it; and (3) we expect iPhone 4 demand may rebound quickly, still outpacing supply and – along with global channel fill — may mitigate possible near-term slowdown in sell-through. The issue, in our opinion, is likely to blow over with media and consumers refocusing on iPhone 4’s appeal, market opportunity, and strong demand.

UPDATE: The outlier, judging from Barrons‘ report, is Bernstein’s Toni Sacconaghi, who told clients he sees a larger problem in what he calls an “emerging pattern of hubris” in the company’s approach to a long list of issues. These include Apple’s refusal to fully discuss Steve Jobs’s health, its attack on Adobe Flash, its restrictions on app developers, its aggressive probe of the lost iPhone prototype and, bizarrely, “its refusal to discuss plans for large cash position.”

“The worry,” he writes, “is that collectively these issues may over time begin to impact consumer’s perceptions of Apple, undermining its enormous prevailing commercial success.”

Although Sacconaghi agrees that an iPhone 4 recall is “highly unlikely,” he priced out the cost: $1.5 billion.

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[Follow Philip Elmer-DeWitt on Twitter @philiped]

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