Its pretty obvious to me that they're making room for higher capacity iPhones to roll out shortly, ie a 16 GB iPhone for 399, maybe higher for a 32GB, etc. Another way to look at it is to begin seeing it as an iPod with an extra hundred or so for the phone capability. They can't charge 299 for the iPod touch and then 200 bucks more for just the cell phone capability.

Lowering the price is a strong signal that there is competition and push back on the price. One of the problems with multi-function phones is that some people that do not use or need all the funtions do not want to pay for them.

For example I think the web functions are great but I have no interest in the integrated music player. They have no options, it is all ot nothing.

I think they have come to the same conclusion so some funtions are being given away, in a manner of speaking.

200 dollars off (1/3 of the price) after just 2 months. That is just amazing. No matter how I look at it, it is a weird thing to do. If another MP3 player company would do this, it would be considered an act of desperation.

http://www.usatoday.com/tech/products/2007-09-05-jobs-qanda_N.htm

Q&A with Jobs about the iPhone price cut and the iPod Touch (plus NBC and the Beatles):

"Q: What do you say to customers who just bought a new iPhone for $599? A: That's what happens in technology."

"Q: Are you taking a hit on costs? A: We're pretty good on the costs side. We're also willing to be more aggressive."

"Q: Are you concerned about cannibalization? A: If anybody is going to cannibalize us, I want it to be us."

APPLE TO CREDIT EXISTING IPHONE CUSTOMERS $100 AFTER CONTROVERSIAL PRICE CUT: WSJ

The reason for the iPhone price reduction is because the iPod needed to be updated.
The iPod was near the end of its cycle and needed an update. After the release of the iPhone, everyone would be up in arms if they didn't release an iPod like the Touch.
Why buy the iPhone when for hundreds of dollars less you can have a contract free iPod that does most of the same stuff?
The solution is to naturally lower the cost of the iPhone and make it more competitive.
Apple isn't lowering the iPhone's price to be more competetive with other smart phone, but rather to make it competetive against iPod touch.

I would say that Apple wants to put high pressures on existing and coming competitors (on margins, on product lines, on marketing...). Such aggressive move could shake big players and all strategies behind mobile positioning, price structures... will Apple succeed ? Difficult to say because the $100 check wasn't planned.. that shows weakness in Apple planning.
Apple has innovated - that s for sure - but it will not last for long in user minds, in press awareness and in competitor reactions.
Such move lets Apple keeping the hand in many aspects of communication and consumer expectations. An aggressive move but could be wise if well planned... Apple is now in position to look for reactions... well camped in the "balcony position" (aka Muppet Show)

Let me expose an European point of view (from Italy).

We have a much different situation over connectivity here, where 'public' WiFi is still to be seen. We have very poor WiFi coverage and this is actually not (or poorly) managed by the telephone carriers. In such a situation an European iPhone would be always connected to the internet via GSM/EDGE.

As you may understand this is not the optimized way to experience iPhone use. Not only, we have a variety of subscriptions (mostly prepaid, and very little phone locking) to the phone carriers but almost nothing as a flat data profile, meaning that the iPhone user would have enormous bills.

So. iPhone needs UMTS to be sold in Europe and needs new tarifs to be studied (it will be using UMTS 90% of the time and WiFi for the rest).

Apple will produce an UMTS iPhone that will cost the original $599 (and as usual, grunt, 599 euros... even if euro to dollar ratio is now around 1.4 )

I aggree with Alberto. This price move opens space to launch a new UMTS model to be deployed over europe in December, with the 599 ($ or €, your choice). Everything is faster and faster this days, including the PLC (product life cycle).

I agree with Alberto. Moving the price of the iPhone down the scale opens a slot for new products in the $499 and $599 price bracket. They have proven that they can successfully sell a phone in this price range and I would expect to see a "3G" version at this level prior to the European launch at the end of October, a typical pre-holiday launch window for Apple.

I was one of the people reading the "Live blogs" of the Apple event. When Steve announced the price drop it never even occurred to me that they were having problems selling the phone. Am I the only one that thinks the reason they dropped the price was to absolutely kill the competition?

The way I see it, Apple wants it to be an iPod/iPhone Christmas. Much like a few years ago when it seemed like everyone got an iPod for Christmas. Apple's current pricing makes Zunes, Treos, Blackberrys, and really iPaqs and other PDAs all seem way overpriced.

In addition, any company that was contemplating a move into this market should think twice about competing against these devices.

I say smart move Apple!