Why the $17,000 gold Apple Watch might actually be too cheap.

Despite its hefty price tag, Apple Watch Edition might actually be too inexpensive. Photo: Apple

The tech world is completely aghast at the price of the gold Apple Watch Edition, which starts at $10,000 but is more likely to set buyers back $17,000 (plus tax!).

The pricing is baking everyone’s noodles. We can’t wrap our heads around a super-expensive watch that will soon be obsolete and is functionally identical to a $350 model. This is not how tech works.

But that’s the point. I wrote how the high-end Apple Watch winds me up — I argued that its very existence is antithetical to Apple’s democratic values. But after further research, it’s obvious that Apple knows exactly what it’s doing, and it’s very smart — even if I still don’t like the gold watch’s enormous price tag.

The Apple Watch Edition is a classic Veblen product. The outrageous price is the whole point. And the higher it gets, the more of them Apple will sell. It might even be priced too low.

Made of 18-karat gold, the Apple Watch Edition is the very definition of a luxury good. These types of items are never purchased for practical reasons. They are bought for a very specific purpose: to display the wealth of the owner. It’s all about status.

In economic terms, items like these are known as Veblen goods — items that increase in demand as the price goes up. Classic examples include a Rolls-Royce Phantom ($500,000), Hermes‘ Matte Crocodile Birkin Bag ($120,000) or an IWC Grande Complication Perpetual watch ($240,000).

The appeal of Veblen goods lies in their exclusive nature, their “snob appeal.” They are desired mostly because the hoi polloi can’t afford them. The higher the price, the less accessible they become to the mass market. Owning a Veblen product sends an unmistakeable message: “I’m richer than you.”

Veblen goods are named after the American economist Thorstein Veblen, best known for coining the term “conspicuous consumption” in his 1899 book, The Theory of the Leisure Class.

“Veblen goods are generally targeted at affluent individuals, have a very strong brand identity that is synonymous with luxury and are far more likely to be sold in upscale boutiques than in common department stores,” according to Wikipedia.

That might as well be describing the sales strategy for the 18-karat gold Apple Watch Edition. Tim Cook barely mentioned it during Monday’s keynote. But luxury customers don’t watch Apple keynotes; they’re too busy yachting. Apple already has a strong luxury brand identity, and has hired several executives from the high-end fashion world (YSL, not JCPenney). Apple is reportedly busy setting up pop-up watch stores in exclusive boutiques.

It’s not clear, but it’s possible the high-end Apple Watches won’t be sold in Apple stores at all. The target audience is not the people you tend to see at your local Apple store, but those who shop at boutiques in Paris, London and New York.

“In order to gain and to hold the esteem of men it is not sufficient merely to possess wealth or power,” Veblen wrote. “The wealth or power must be put in evidence, for esteem is awarded only on evidence.”

In defense of obsolescence

The tech crowd is bemoaning the fact that the Apple Watch will soon be obsolete. If the Watch is developed at the same pace of the iPhone, the second- or third-generation product will be much better than the initial models. Lots of techies on Twitter have suggested the gold models will likely be upgradeable, or that Apple will set up some kind of trade-in scheme.

This completely misses the point.

In the rarefied world of luxury, obsolescence is a feature, not a bug. The fact that the Apple Watch will be obsolete in a year or two makes it even more desirable to the luxury consumer. In fact, the quicker it becomes obsolete, the better.

Obsolescence makes it even more luxurious than items like analog watches or jewelry, which remain useful for decades. The luxury buyer will simply upgrade to the latest model, and stash the old one in a drawer. Or give it to the maid.

It’s an ostentatious display of wealth — and tech folks can’t wrap their brains around it. It’s not practical. But the tech matters not. It’s almost irrelevant.

Vertu has made a fortune selling super-expensive cellphones to the elite. Photo: Vertu

Vertu, the luxury mobile phone maker, serves as a good example. The company was studied by Jony Ive, according to The New Yorker’s recent profile of Apple’s design guru, and could be a model for Apple’s strategy.

Vertu sells outrageously expensive mobile phones that are made of solid gold or covered in jewels. The phones are beautifully crafted but technologically backward. Until recently, its offerings were simple feature phones based on standard Nokia mobiles (Vertu was a spinoff of the Finnish company) that cost between $6,000 and $12,000, or hundreds of thousands for custom orders. It didn’t even have a smartphone until 2103, when it released handsets running Android that cost between $10,000 and $20,000, depending on bedazzle.

It sounds crazy, but the company is booming. It employs more than 1,000 — including many craftspeople — at its U.K. headquarters. Vertu phones are available in more than 500 stores round the globe, including 70 of the company’s own boutiques. It even has rivals like Bellperre from the Netherlands, Goldvish from Switzerland, and luxury phones from the likes of Christian Dior and the watchmaker Tag Heuer.

There a several similarities between Vertu’s and Apple’s strategies for selling spendy devices. The gold Apple Watch will be sold in the same boutiques that carry Vertu (Galeries Lafayette in Paris, Isetan in Tokyo, and Selfridges in London), where elite shoppers get hands-on service. Both companies employ precious metals and promise that their high-end products will be produced in extremely limited runs.

Designer Clive Grinyer, Ive’s friend and former business partner from London, said Vertu is succeeding because luxury customers haven’t been offered much choice in the mobile phone market.

“They proved that excellent manufacturing and care of a product (and then a few gemstones) resonated with customers,” he said. “Vertu showed that people do want to flaunt their luxury objects, overriding the technology, which is pretty basic in the Vertu…. Vertu customers aren’t that interested in technology and this is more of a desirable object than desirable tech.”

Until now, Apple has taken an approach that’s opposite to Vertu’s, offering products of “outstanding beauty and technical innovation at an affordable price,” Grinyer said. But with the Watch, Cupertino is taking a distinctly Vertu-like approach.

The high-end watch “gives a chance for customers who choose to express themselves in that way to do so,” said Grinyer, who considered doing design work for Vertu a few years ago, but passed because it was “too bling.”

There’s no shortage of potential buyers for such extravagant items. Bain & Company estimated the 2014 global luxury market to be worth $238 billion, with Chinese consumers the biggest and fastest-growing group. Apple is making a big push into China, which recently displaced Japan to become Cupertino’s second-biggest market after North America.

Still, Grinyer said the watch isn’t a “pure” Veblen product.

“The cost is linked to the actual cost rather than a markup to reflect its luxury status, which I guess would be pure Veblen,” he said. “But the effect is probably much the same. I think the gold watch reflects an attempt to embrace the drivers of different cultural mores…. The watch is playing to a wider audience and embracing other ways that people express themselves, whether in China, Saudi or Las Vegas. And that is what I find interesting and important in a post-Jobs world.”

When you look at it that way, the Apple Watch Edition isn’t priced nearly high enough. Maybe Cupertino should tack on an extra zero.

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