Why Apple wants you to believe it is a luxury goods company

Angela AhrendtsAP/Tony AvelarAngela Ahrendts, former CEO of Burberry, current head of retail at Apple

We’re only hours away from Apple releasing the Apple Watch, but a new narrative about Apple as a result of the watch has already taken hold.

Apple is no longer a consumer electronics company. It is now a luxury goods company, much like Louis Vuitton, according to the pundits. Here’s a small sample of people calling Apple a luxury goods company now, with our emphasis added:

  • The Wall Street Journal, for instance, had this to say about Apple in its Apple Watch preview story, “Apple Inc. is technology’s luxury brand. Now it is crossing into high-end fashion, with a smartwatch that blurs the lines between jewelry and gadgetry.”
  • Google Ventures partner MG Siegler said, “It’s not about the Watch, per se. It’s about what the Watch stands for: a new Apple that is just as much about fashion as it is about function . This is no longer Steve Jobs’ crossroads of technology and liberal arts. It’s the fork in the road between technology, liberal arts, and fashion. Jony Ive’s fork.”
  • Neil Cybart, an independent analyst that covers Apple said one of the goals of today’s event is to, “Reposition Apple as a premium mass-market luxury brand. Apple is currently a premium mass-market brand, selling gadgets to addressable markets that number in the hundreds of millions. With Apple Watch, Apple is entering new territory, embracing luxury and the required scarcity of supply that comes with a luxury label. Such scarcity at the high-end is obtained by controlling the demand side of the equation through high prices. Apple Watch Edition collection prices will likely shock those observers who aren’t aware of Apple’s motivation to become more like a luxury brand.”

While Apple has always been about premium pricing, it’s fascinating to see people really embrace the idea of Apple as a luxury brand. Because, who’s kidding who? Apple is not a luxury brand. Just take a step in an Apple Store some time. It’s not filled with luxury buyers.

But, the acceptance of Apple as a luxury company contrasts sharply with where the company was just two years ago.

In 2013, when Apple’s stock was tanking, there were numerous credible reports that Apple was planning to release a plastic phone. People were thrilled because they assumed Apple was finally ready to go down-market. Many people assumed the plastic phone would cost $US300, or maybe even less.

“I sure hope Apple does announce and ship a cheap iPhone that prepaid users can purchase for less than $US20o,” said influential VC Fred Wilson at the time.

Andreessen Horowitz partner Benedict Evans said of the rumours of a low-cost iPhone: “There is absolutely no technical reason why Apple could not make a great iPhone and sell it for $US300 or so today.”

At the time, Samsung was on the rise. Apple’s growth had significantly decelerated, and it looked like the market for high-end smartphones was saturated. It looked like anyone that could afford an iPhone had bought an iPhone. It looked like Android, which had largely caught up to the iPhone in features, but generally cost half the price of an iPhone, was ready to take over the world.

When Apple did announce the plastic iPhone, the iPhone 5C, it shocked the world by charging $US550 for the phone unlocked. This was not the discounted phone people expected.

The reaction to Apple’s decision was harsh.

“The C in 5C does not mean ‘cheap’ as I had hoped. It means clueless, as in clueless about how the vast majority of new smartphone users are paying for their phones,” said Wilson.

But, Apple made the exact right move. Apple stuck by its strategy to keep its prices high. If Apple had lowered the price of the phone, it would have killed what made Apple special.

Apple doubled down on its high-price strategy with the iPhone 6, charging $US650 for the entry level iPhone, and $US750 for the entry level iPhone 6 Plus.

Those two new phones, which are double the price of the average Android phone, are blockbusters. Apple’s iPhone sales growth reaccelerated thanks to those phones, despite their price. The average price people paid for an iPhone is at all-time high. And this is happening, despite the fact that Android-based phones are better than ever for less money than ever.

Apple’s slow-down in growth had little to do with the price of the phone. It was that Apple was offering a 4-inch screen when Android phones at their smallest had 4.7-inch screens. Once Apple made the screen bigger, sales took off.

Today, Apple is expected to continue with this strategy. It will announce the Apple Watch, its first new product category in five years. The entry level price for an Apple Watch is $US350. The average price for an Android based watch is $US200.

But the entry level Apple Watch is the least exciting Apple Watch. What everyone is keeping an eye on is the price of the mid-tier Apple Watch, as well as the high-end Apple Watch price. Estimates are all over the map for those watches. But people are expecting the top of the line watch will be $US10,000 or more.

The only way Apple can trick people into paying $US10,000 for a technology product is to position it as a luxury good.

Computers are, by design, made worthless every few years. Try selling an iPhone 4 on eBay. You’ll get $US70-$US100 for a phone that cost $US650 just a few years ago.

Rolexes, like other luxury goods, hold their value for a long time.

That’s, at least in part, why Apple will try to convince the world that it is selling a luxury item. Because, if it’s not a luxury brand, then people are just getting ripped off.

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