Connectivity issues with Apple's popular iPhone 3G likely stem from the device, not the wireless carriers that support it, a problem that blemishes a product that has won rave reviews since it made its debut two months ago.

As soon as Apple began selling its latest smart phone two months ago, owners started complaining about dropped calls and vexingly slow Internet connections. Initially, the blame was placed on phone carriers, whose systems were believed to have been overwhelmed by the number of iPhones.

Now, the blame has shifted to the iPhone itself. On Sept. 6, a unit of German phone operator T Mobile, a subsidiary of Deutsche Telekom, noted on a blog that it had asked Apple to address problems with the device that were causing its customers to complain. Verizon Wireless quickly followed, telling its sales people to advise potential customers about the iPhone's technical problems.

While the glitch, which has been documented by independent analysts, is unlikely to derail Apple's target of selling 10 million iPhones before the end of the year, it adds to a growing number of product issues that have tarnished Apple's reputation for designing glitch-free, easy-to-use devices and services. In addition to the iPhone 3G troubles, Apple's MobileMe online services debut was such a dud that Apple had to apologize twice and later provide free months of service. Meanwhile, Apple is investigating episodes of overheating iPods in Japan and this week, had to recall iPhone 3G power adapters.

Those problems have contributed to a sell-off in the Cupertino, Calif., company's stock that has stripped $24 billion in market capitalization since Apple shares hit an all-time high Dec. 27. In midday trading on Tuesday, Apple had risen 24 cents to $131.30.

Apple tacitly acknowledged the iPhone was responsible for the problems a week ago, when it released software to improve communications with 3G networks.

Apple declined to comment for this report.

Richard Windsor, an analyst at Nomura Securities who has a track record of correctly analyzing issues with the iPhone, said the problem lies with a chip inside the iPhone that directs the phone's operations. The chip, made by German semiconductor maker Infineon Technologies, is supposedly unable to handle the load the iPhone puts on it.

"The device is at fault," said Windsor. Despite the issues, Windsor said the iPhone is a good handset and that Apple will be able to correct the problem in subsequent versions of the phone, which doubles as a music player and photo display.

As Apple searches for a fix, Apple's competitors are aggressively making note of the iPhone's reception problems. Verizon Wireless, the second-biggest wireless network in the U.S., has been particularly aggressive.

"AT&T's network still suspect" and "iPhone Reception on AT&T's '3G' Network: Static" headlined two of scores of emails Verizon Wireless public-relations staffers have been sending to journalists.

The iPhone's spotty reception and poor Internet connectivity were first documented in online forums on July 11, the day the device went on sale, along with other more minor issues like activating the phone. Customer complaints were exacerbated by difficulties initializing the device when it launched.

Several lawsuits have been filed blaming Apple and AT&T, the exclusive U.S. dealer for the iPhone.

AT&T Chief Technology Officer John Donovan declined to comment on the matter in a recent interview with Dow Jones Newswires, and referred comment to Apple.

However, an AT&T executive, who declined to speak on the record because he isn't authorized to discuss the matter, said the company "can only conclude" the problem lies with the iPhone."

Apple appears to be taking the situation seriously. On Aug. 19, Apple launched an iPhone software upgrade that it said would cut the number of dropped calls and improve the performance of text messages and emails. Many analysts interpreted the fact that the upgrade came from Apple, rather than the phone carriers, as a tacit indication that the company realizes the device is causing the problems.

Still, the company hasn't communicated its intentions on how it will resolve the issues to either iPhone users or investors. The day after the software patch was released, an Apple spokeswoman, Natalie Kerris, said the update was to "improve communications with 3G networks," referring to fast mobile phone services.

Even with the fix, the iPhone 3G's Web connectivity has continued to lag behind competitors. Nomura's Windsor says the Apple won't be able to solve the problems with software alone, suggesting the company will have to rebuild the phone.

That has some iPhone users angry.

"I can still barely make a phone call from my apartment," wrote one iPhone owner who uses the screen name Sweetbike40, on the MacRumors Web site. "I'm not too thrilled."

Source:Dow Jones