Does Apple's future depend on income inequality?

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It's been a week, and the tech world has had a chance to digest (and digest and digest) the New Yorker's profile of Apple design guru Jony Ive. Most of the reaction so far has focused on Ive's luxury predilections—his chauffeured Bentley, the Gulfstream GV he bought from Steve Jobs's widow—and his obsessive approach to the design of his pet project, the soon-to-be-released Apple Watch.


But the most revealing paragraph in the piece wasn't about the Apple Watch's modular design, or its sapphire-finished zirconia ceramic, or any of the other minute details Ive and his team have spent years agonizing over. It was this one, about the negotiations between Ive and other Apple executives over how the watch should be priced:

It wasn’t clear how the company would display such things in stores; there were also concerns about creating a divide between wealthy and less wealthy customers. (As [former Apple engineer Bob] Mansfield said, “Apple wants to build products for everybody.”) But Ive won the argument, and in 2013 the company announced the high-level appointments of Angela Ahrendts, the former C.E.O. of Burberry, and Paul Deneve, the former C.E.O. of the Yves Saint Laurent Group. Patrick Pruniaux, from TAG Heuer, a part of the L.V.M.H. luxury conglomerate, was hired last year.

This (emphasis mine) is a very deep and meaningful tension that sits at the core of Apple's mission: "build products for everyone" versus "build products for everyone, plus some luxury products that only the ultra-rich can afford." And the fact that Jony Ive won the argument says much more than that he's good at playing corporate politics. To me, it says that Apple is positioning itself for a world of widening income inequality.

Several weeks ago, New York's Annie Lowrey described the economic "barbell effect," in which companies succeed in a high-inequality environment by catering either to the very high or very low end of a given market. The example she used was gyms — both Planet Fitness ($10 a month) and CrossFit ($100+ a month) are thriving, but the gyms that cost $50 or $60 a month are struggling.

The barbell effect is playing out in lots of industries these days, but so far, it's been far less pronounced in the markets Apple competes in. Take smartphones, for example. The low-end smartphone market is dominated by Android phones, and a few makers (Motorola, Xiaomi, OnePlus) have profited handsomely from the influx of new, low-income smartphone users in places like India and China. But there's no real luxury smartphone option. Even the most expensive iPhone is only three or four times the price of its cheapest competitors, and is still affordable to millions of middle-income Americans. You simply can't spend $10,000 on a phone the way you can on a purse, or a bottle of wine, or a night in a hotel penthouse.

In other words, as Robin Sloan points out, the smartphone industry is a "Warhol market," one whose pricing structure is capped at the top. (It's a reference to the famous Andy Warhol quote about the social flattening effect of certain consumer goods: "What’s great about this country is that America started the tradition where the richest consumers buy essentially the same things as the poorest. You can be watching TV and see Coca-Cola, and you know that the President drinks Coke, Liz Taylor drinks Coke, and just think, you can drink Coke, too. A Coke is a Coke and no amount of money can get you a better Coke than the one the bum on the corner is drinking.")


The iPhone's Warhol-ness has been good for Apple. It meant that hundreds of millions of people could buy a top-of-the-line smartphone, and get the same technological experience as Hollywood celebrities and heads of state. (This social equivalence was important: one reason the iPhone 5C was a relative flop is because it sent the wrong signals—having one meant you couldn't afford the more expensive 5S.) But capping its prices also meant that Apple left billions of dollars on the table. There are lots of people in the world (okay, a few) who would happily pay $10,000 for an iPhone, if it came with features and perks not available on lower-end models. And until now, there's been no way for Apple to take their money.

With a new high-end watch strategy, Apple may be trying to de-Warhol itself. In a world of extreme (and widening) income inequality, it can extract much more from its high-end customers than they're currently paying. But to do so, it has to make luxury goods at prices that shove those goods out of the reach of the vast majority of its customers. You can't just price a Birkin bag twice at double the cost of a Forever 21 clutch; for it to be coveted by millionaires and billionaires, it has to be hundreds of times the price.


Jon Gruber, one of the more enlightened Apple obsessives, believes that the Apple Watch Edition (the most expensive, gold version) will cost between $10,000 and $20,000. That feels about right, given the existing market for luxury watches in that range. These watches will have the same computer hardware as the cheaper versions. But they'll be made of gold, accessorized with different watch bands, and will carry the patina of luxury. If you see someone wearing one, you'll know you're in the presence of wealth.

Where this stratification could be be most interesting, though, is in Apple's possible upcoming car project. If Apple is aiming at the luxury watch market, it could be aiming at the luxury car market, too. It is hiring engineers from Tesla, whose cheapest model currently costs around $70,000. And it's already drawing comparisons to Porsche and BMW. It wouldn't be surprising if Apple took a tiered approach to cars, as well as watches.


In an increasingly barbell-shaped global economy, where countries like China—whose income inequality is even worse than ours—make up a huge percentage of the customer base for consumer electronics, it's smart for Apple to start selling luxury goods. At the top end of both the watch and car markets, there's very little price sensitivity. (A person who can afford a $10,000 watch can probably afford a $20,000 watch, and a buyer who is in the market for an $80,000 car won't blanch at a $100,000 car with more bells and whistles.) Unlike $800 smartphones, you don't need to sell millions of $20,000 watches or $80,000 cars to move the needle. And if you can maintain your grip on the middle-market while selling to the top end, you've just created an entirely new, insanely profitable category of goods.

But the ability to do that rests on the existence of a large class of consumers for whom money is no object, and for whom the social signaling of wealth is nearly as important as the goods themselves. Take away the US's income distribution and replace it with, say, Denmark's, and the strategy starts to make less sense.


Now, bear in mind that all of this is speculative. For all I know, the motive behind offering higher-priced items may be as simple as: Jony Ive likes fancy things, so we're building more of them. But it's remarkable how well-suited Apple's new strategy is to the Pikettyish world in which we live. And it wouldn't surprise me if Apple's design geniuses also consulted with a few macroeconomic forecasters, who told them: go ahead, price these however high you want—there will be plenty of rich people to buy them.