8GB iPhone drops $200 in price overnight

n 8-gigabyte iPhone will now sell for $399, $200 less than the price consumers paid just three months ago when the iPhone launched on June 29, and $100 less than what a 4-gigabyte version of the phone cost at the time. It's leaving a lot of consumers unhappy who got stuck paying the huge price tag (there's actually a petition against Apple Inc. (NASDAQ: AAPL) to compensate current iPhone customers floating around the internet), but it's also baffling a lot of investors.

Apple, which rarely reduces prices has effected the price reduction just two months after the iPhone launch. Some analysts were quick to rip Apple. Trip Chowdry of Global Equities Research said "the iPhone is suffering from significant strategic and tactical missteps." But in reality, cutting the price of the iPhone was probably a brilliant strategic move. Demand can't be that bad because Jobs reiterated the company's goal of selling 1 million iPhones by the end of the quarter. So what's really behind the move? Despite what will be a hit to cushy margins, Apple is more concerned about driving unit demand to grab a greater share of the cell phone market.

Right now, the research firm iSuppli notes that the iPhone made up 1.8% of the entire U.S. handset market during the month of August. Long time bull, and Piper Jaffray analyst Gene Munster believes that, the price cut isn't because of a slow market adoption of the iPhone, but because Apple wants to be a "a legitimate player in the mobile handset market within 1-2 years versus our previous expectation of 2-3 years." Inevitably the headlines have stolen the show, as Apple shares are off by 8% since mid-day Wednesday even though analyst earnings estimates, ratings, and price targets have been virtually unchanged.

The market also seems to be ignoring the fact that the revamped iPod line up should do well during the holiday season, and that the iPhone price cut should reduce cannibalization with the new touchscreen iPod.