The Apple Watch’s Insanely Great Economics!

The most compelling case you can make for the Apple Watch is that it frees us from our phones: the ones Apple sold us. No longer will we have to pull them out to hail Ubers, check Instagram, or send texts. As TechCrunch’s Matthew Panzarino elegantly points out, “There are very few products that allow you to hand someone cash and be given back time. This will be the Apple Watch metric to track: time saved.”

That makes sense. Consumer electronics have always evolved in stages. First comes increasing power, then increasing portability, then increasing ease of use, and then, finally, increasing invisibility. We want technology to become an afterthought rather than the foreground. Wewant not be dominated by our technologies, but rather, to control them.

All of which might be good enough reason to buy the thing. But there’s more at stake for Apple.

With a valuation hovering above $700 billion, Apple’s corporate concerns are far different from those of its many competitors, or even the companies like Exxon that command similarly gargantuan resources. It doesn’t sell energy. The little market-making that it does do, in the form of the app store, is a mere afterthought to its bottom line. Apple makes stuff. To grow that $700 billion into $1 trillion, it can’t make cheap stuff. A hundred-dollar gadget would have to sell to virtually every middle-class family in the country to yield meaningful revenues for Apple. So the company is pursuing another strategy: Progressively moving the price points of Apple’s wares ever higher.

Consider: Apple, with its $650 cellphones and $1,500 computers, already makes perhaps the fifth or sixth most expensive item in a high-income household, right behind furniture, luxury goods, TV’s, cars, and homes. And guess what? They’re now in the luxury goods business. There are rumors that they’ve been trying to make a TV for some time. Reports suggest they are investing heavily in making a car. These are high-ticket items, and that’s why the most important thing the Apple Watch might do for Apple is get us used to the idea that Apple makes goods worth spending many thousands of dollars on. More to the point: goods which, like TVs and Cars, are meant to last not just a couple years, but perhaps ten years and beyond. If the Apple Watch is even a modest success among luxury consumers, you can bet the company will be that much more confident about moving into categories such as cars.

Maybe you’re thinking right now that the Apple watch isn’t just a luxury good. You’re right. Apple will probably sell many more watches at $349 than it will at $10,000, the starting price for the Apple Watch Edition. It’s a good bet that revenues from the Apple Watch Sport will dwarf those from the Apple Watch Edition.

But therein lies something that only Apple can attempt, thanks to its unprecedented economies of scale.

Attacking Both the High and Low End With Just One Product

A few years ago, the CEO of Vertu was showing me the company’s newest $8,000 phone, bragging that the gadget was far more substantial and well-made that any $500 iPhone could hope to be. I stopped him short, pointing out that the iPhone isn’t a $500 gadget. It’s a $1 billion gadget. After all, how many billions has it cost in R&D, to develop all the gobsmacking manufacturing techniques, all the software tricks, the App Store, and all the battery tech inside? The reason it costs so much less than a Vertu isn’t because it’s less well made. It’s because 700 million people have helped amortize Apple’s investment in it.

Apple now seems hell bent on finding new ways to flex that muscle.

In the marketing materials on its website, Apple is surprisingly forthcoming about its famously secret manufacturing details: the 316L stainless steel, cold-forged to make it 40% harder than regular steel, less apt to be scratched; the Link Bracelet, which has 140 components and takes nine hours to mill. Even the gold is twice as hard as regular 18-carat—and it’s a new, patented type of ceramic gold alloy that literally manages to pack in twice as many gold atoms into a given space. Even the “cheap” Sport model is made with Apple’s own special aluminum alloy.

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But those details pertain just to cases and straps—a skin compared to the engineering and manufacturing shared by all of the Apple Watches. The silicon guts inside and the pixels on the screen. They are all in service of one simple marketing move that any other company couldn’t hope to attempt: Selling one design platform, with a retail that ranges from $349 to $17,000; it simultaneously attacks the low-end of a new market and the high-end at the same time. It is competition for both $200 G-Shocks and $25,000 Rolexes.

Businesses almost never work like this. Typically, they either try to introduce a new premium product to a market that’s been commodified, or they try to compete on price, in markets that award very high margins to ultra-premium segments. (Think of Audi ten years ago: Cheaper than a BMW, almost as good.) To date, Apple has mostly pursued the former strategy—and companies almost never switch it up. You’ll never see Rolex try to sell a $300 watch, because of the catastrophic damage it could do to its high-end sales. Likewise, G-shock would be insane to attempt to sell a $1,000 watch, much less a $17,000 one.

That Apple is even trying to play this double game is testament to its manufacturing innovations, which recall nothing so much as the Ford Model T, which spoke to a new vision for both manufacturing and the consumer market. Apple can democratize a watch no other company could even make, at a price low enough to reach the masses—while also making claim that this is the most finely made item of its kind, ever. That’s what the iPhone was always about.

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No wonder then that manufacturing has become so vital to Apple’s marketing. Apple wants to say, not only is this the best $349 watch you can buy, it’s also the best $10,000 watch you can buy because no one can manufacture anything with the scale and precision as Apple. And they’re probably right. This, after all, is the same company that, when they invented the unibody aluminum MacBook, decided to buy 10,000 CNC mills that could do the job—thus devouring any competitor’s hope at catching up.

But the broader test is one of Apple’s brand. Can they really sell to heads of state, rappers, soccer moms, social marketing gurus, and 17-year-olds at the same time, with a gadget that functions exactly the same at every price point? Watches, of course, already do this. But they don’t do this under the aegis of a single, unified brand. Apple, however, isn’t quite like any other brand out there. The company already plays both the high-end and low-end. Rappers and teenagers alike already own iPhones, and they don’t seem to mind the other. It’s Apple.

You could argue that this is merely a special feature of the consumer-electronics market. We’re okay with one brand making everyone’s cellphones, because no company could do so without enormous scale. That’s enough to explain the Apple premium for commodity gadgets. But why would rich people be willing to forgo a presidential Rolex in favor of Apple Watch Edition? Apple could easily say that the Apple Watch is simply more useful than any Rolex could hope to be, and better made. In Monday’s presentation, they said it like this: We live on our phones, so isn’t the ultimate luxury being able to live away from them?

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