The Critical Path #145: Arbitrage

Back from the Apple Watch event, Horace gives his trip report discussing watch pricing and what we now know of how Apple intends to sell them. What cognitive illusions might come into play as people consider the watch?

via 5by5 | The Critical Path #145: Arbitrage.

  • neutrino23

    I see frequent posts that the gold Apple Watch is not worth it, that no one sane would buy it, and that it was a mistake to make it. Even Wozniak was quoted as saying he didn’t see the need for the gold watch. (Spoken like a true engineer.)

    I think this is from our Puritan or Calvinistic past. Even if we are not religious this strain wanting to to be plain runs through our culture. In other countries it is not like this.

    I lived for a long time in Japan. When visitors came from the states a fun thing to do was to take them shopping in Tokyo and show them the $300 melons. They always were totally amazed. A melon should cost about $1, not $300, they felt. They couldn’t concieve of a melon this expensive. In Japan these are grown as gifts. The farmers take great care of them. They grow on little pillows and the farmers turn them several times a day so they are perfectly round with absolutely no blemishes. They are living works of art used as gifts.

    Similarly, I just heard that there is a new kind of strawberry being sold in Japan for $10 each. Not a flat, not a basket, a single strawberry in it’s own plastic package is sold for $10. Again, these are probably gifts for some special occasion when you need to give something that is of a certain value. You can buy enough of these extravagent strawberries to achieve the value you desire.

    For business people or business owners a $10,000 watch is not out of line for a gift.

    In Taiwan I once attended a huge party because a fairly wealthy businessman I knew had the misfortune to hit a hole-in-one at golf. To celebrate this wonder he rented out a hotel ballroom and hosted a gigantic party with food and an open bar. It was amazing. Fortunately, he had insurance just for that purpose. Something not commonly sold in the US. My point is that in Asia the sensibilities are just different, and for many people a $10,000 or $15,000 gift is nothing unusual. The Apple Watch Edition will be a great gift because it is so much in the news.

    • marcoselmalo

      Social prestige is a thing and has value. If it did not, there wouldn’t be societies with major gift economy components, conspicuous consumption, or status symbols. I think the Watch Edition hits on all three.

    • Mark Howard

      Your comment about the underlying Calvinist influences in American culture and society, which shapes so many perspectives (regardless of the fact that the culture is now predominantly secularised) is a valid point and should be included in any deep product/positioning analysis within a global market.

      In short, Calvinism promoted the ideas that the chosen ones would be distinguished by their economic success. Two photo ideas of this are 1) One does not help others to be successful – they need to bootstrap themselves to prove they are also chosen and 2) One does not need to follow their heritage, and can break away economically from the family farm or business, providing economic mobility.

      Interestingly, the *results* of economic success are *not* to be hoarded or displayed extravagantly; the work/success is the important part, not the rewards.

      Using these viewpoints one can clearly see how the religious influences of early America are intertwined into our current economic culture, even though there is no longer any religious aspect to them. That is why so many claim to be “spinning their wheels”, as they are performing the requisite actions economically, yet no longer understand the long-gone religious goals.

    • Although Japanese society has always possessed a keen interest in fine craftsmanship, it’s been my experience, their culture doesn’t wear their wealth as a badge of honor.

      In the last fifty-years, the Japanese people have bought more black or white cars than any other color available because they’re conditioned to not “stand out” and draw unwanted attention to themselves. They don’t flaunt their wealth, nor do they favor an opulent lifestyle.

      However, with each new generation, histories, customs, and courtesies are lost and old makes way for the new, but Asia is not the market for Apple Watch. China, et. al., are jaded by fifty-dollar Rolexes.

      Europe is the ultimate challenge. No one can appreciate a timepiece like the Europeans, who not only make the most luxurious watches on the planet, but are, bar none, the most expensive timepieces ever made.

      Apple has the edge though; Silicon over metal. Apple is going to encroach into a territory once reserved for precision-made products consisting of hundreds of working pieces, with a new system that consists of billions of working pieces, for a fraction of the cost.

      Apple will conquer Europe with their endearing functionality and values.

      Go AAPL!

      • If you think Europe is the target for Edition and not China, you’re deeply, woefully and comically mistaken.

      • And if you think because they’re an emerging economy with billions to spend everyone will be sporting the Edition, you need to get out of your cubicle more often.

        If China wants an Apple Watch they’ll make one, or a million. But, the market Apple is after is the one where money is no object, only craftsmanship.

      • knardi

        Says the guy who thinks Horace Dediu works in a cubicle.

      • Number crunchers live within a box!

      • neutrino23

        I agree that the Japanese tend not to flaunt their wealth. My point about the melon story was just that different cultures can have vastly different ideas about what is normal.

    • Mark

      I see frequent posts that the gold Apple Watch is not worth it, that no one sane would buy it, and that it was a mistake to make it. … I think this is from our Puritan or Calvinistic past.

      I don’t think Calvinism and religion have little to do with it. I think it begins with the standard cognitive dissonance between Apple & Google/MS/fill-in-the-blank reductionistic geekdom who think that tech is pure function, which should be determined by parts lists and various other reductionist understandings and self-understandings projected onto “real users” and what they should want. Then added to this confused mess (in the mind of the average techno-geek of this type) is an even greater dissonance of the combo of tech and luxury. What other machines are luxury items? Cars and watches. Luxury cars and watches have been around ever since there were cars and watches.

      Now tech machines are going luxury. The next iteration and a natural thing. But in the minds of the usual suspects it is like beams crossing, worlds colliding, and cats and dogs living together all in one. Nothing is sacred now. Forget Calvinism, there’s your explanation. People hate change, and it confuses them too.

  • Selling the gold watch turns the smart watch market from a technology play to a luxury one, and it appears it’s caught all of Apple’s competitors in this area flat footed. It immediately opens up the watch to the mass market (albeit at the high income end), and explains Apple’s focus on the simple timekeeping aspects – this is a beautiful watch that can work with the other tools in your life to connect you to the people around you.

    It’s a much more impressive message than previous smart watch hardware, where the focus has been the tech angle.

    We may laugh now, but Apple won’t be the only company with expensive high end luxury watches – in that they’ve come first, something that rarely happens. Now the swiss watch makers will add tech, and the tech companies will add bling, but only Apple is placed with feet firmly in both camps.

    • Mark

      >> Now the swiss watch makers will add tech

      Just like the cell phone companies added tech. Nokia and Blackberry?

  • Tytus Suski

    Speaking of cognitive illusions, which one is true:

    A) Is the Watch Edition an add-on to “functional” watch models. Say, a natural result of a customer segmentation approach
    B) Are steel and aluminium models, and in fact the whole smartwatch concept been created by Apple as a cover-up for a need to produce sth conspicuously and unapologetically luxurious

  • BoydWaters

    Remarkable that Apple uses the Watch to enter a new market in time to preserve profit margins, just as phones race to the bottom.

  • GuruFlower

    Here’s an interesting estimate of the gross margins on luxury watches:
    If this is reasonable and they are around 64% then Apple is way above the market at 80% – 90% on the Edition. After all, Apple’s complications are software, not pieces of machinery. So I question the rationale of $9,000 added cost for the Edition simply for the cost of the gold.