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Originally published July 13, 2010 at 10:03 PM | Page modified July 14, 2010 at 7:35 AM

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Apple shares fall as concern grows over iPhone 4

Apple declined a day after Consumer Reports said it wouldn't recommend the iPhone 4, fueling concern that demand for the smartphone may drop and speculation that the handset may be recalled.

Apple declined a day after Consumer Reports said it wouldn't recommend the iPhone 4, fueling concern that demand for the smartphone may drop and speculation that the handset may be recalled.

Apple fell $5.49, or 2.1 percent, to close at $251.80. The stock, up 19 percent this year, has dropped 7.1 percent since June 23, the day before the iPhone 4 was released.

Consumer Reports said it wouldn't recommend the latest version of the iPhone after tests confirmed that the device has a hardware flaw that can diminish signal strength if held in a certain way. The report is spurring speculation of an Apple recall, said Vijay Rakesh, an analyst at Sterne Agee & Leach in Chicago.

"This is not like a BP or Toyota situation where the measures are much more drastic," Rakesh said. He said incidents of iPhone 4 antenna problems aren't widespread, and checks with retail outlets indicate demand for the phone is strong.

Rakesh said an Apple recall would cost less than $100 million. Toni Sacconaghi, an analyst at Sanford Bernstein & Co., put the price tag at $1.5 billion, though he called such an outcome "highly unlikely." Issuing rubber cases to cover the phone's trouble spot in the bottom-left corner would cost Apple $1 per unit, he said Tuesday in a report.

"Apple's image — and potentially iPhone sales — could be compromised if Apple does not explicitly — and constructively — address the issue of what it believes is wrong with the phone and how it will address it," said Sacconaghi, who rates Apple "outperform."

Gene Munster, an analyst at Piper Jaffray, said the problem may be periodically affecting 25 percent of iPhone 4 owners. The issue is being "overblown" and Apple could give away cases to allay customer concerns, he said. Munster also said a recall is "highly unlikely."

An Apple representative didn't respond to a request for comment. Apple has suggested users hold the phone in a way that doesn't cover the lower-left corner or use a case. The company also said the problem could be related to faulty software that overstates signal strength.

Apple said it will be changing the formula for calculating how many reception bars to display.

Consumer Reports said its findings "call into question" Apple's claim that the problem is an "optical illusion." A solution recommended by Consumer Reports is to place a piece of duct tape over the bottom-left corner of the phone.

In an early review, based on a few hours of use, Consumer Reports had first called the device the "best iPhone yet" and an "exception to the rule that successful franchises typically run out of excitement and creativity after several sequels."

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