Last September, when Apple announced that its long-rumored smartwatch would arrive in "early 2015," the company was mum about pricing. There would be solid gold, stainless steel, and aluminum versions, but Apple would reveal only that an entry-level model would start at $349. At the time, many speculated that the gold version might sell for $1,500 to $2,000.
John Gruber, the dean of Apple bloggers, quickly scoffed at those estimates, writing that the gold version would sell for at least $5,000. More recently, he predicted it would start at $10,000 and could easily run twice that for models with premium bands.
When the company finally announced its prices on Monday, Gruber's most recent prediction proved eerily prescient: The gold version will start at $10,000 and will sell for as much $17,000 with certain bands.
In a world that outlawed differential pricing, there would be higher prices for goods of lower quality
But another of Gruber's predictions fell flat. Back in September, he wrote, "When the prices of the steel and (especially) gold Apple Watches are announced, I expect the tech press to have the biggest collective shit-fit in the history of Apple-versus-the-standard-tech-industry shit-fits." And yes, some people are saying that Apple has lost its mind, but that happens whenever the company makes a significant product announcement. Overall, the reaction to the gold Edition's lofty prices has been rather muted.
No reasonable observer, in fact, could find grounds for objecting to the company's pricing announcements. On the contrary, had Apple chosen a significantly lower price point for its gold Edition, its shareholders (among whom I am one) and customers alike would have had good reason to feel aggrieved.
How the $10,000 gold Edition promotes both efficiency and fairness
Companies in every industry engage in what economists misleadingly call price discrimination — the practice of charging different buyers different prices for essentially the same product. Booksellers, for example, charge twice as much for hardbacks as for paperbacks, even though production costs for the two editions barely differ.
The term discrimination suggests something odious. Yet because the practice is beneficial for the most part, I prefer to call it differential pricing. In any case, buyers of the higher-priced versions sometimes feel victimized. So those buyers might be surprised to learn that in a parallel world that outlawed differential pricing, they'd end up paying even higher prices for goods of significantly lower quality.
That's a particularly likely outcome whenever development costs loom large in a product's life cycle, as they clearly do for the Apple Watch. Its development has consumed the full-time attention of many hundreds of the company's most talented software engineers, designers, materials scientists, manufacturing specialists, health experts, and others for almost four years. Yet Apple's aluminum Sport watch, whose innards are identical to those of the gold Edition, starts at just $349, a relatively modest figure in the premium watch category.
For Apple to recover its massive investment in this project, it must sell many millions of units each year, so that the margins on each unit will add up to a significant fraction of development costs. It must also sell a significant number of units at premium prices, whose higher margins will offset the remaining development costs. It wouldn't have made sense for the company to have invested so heavily in this project if it had been required to sell every unit at the entry-level price.
Is it unfair to ask buyers of the gold watch to shoulder a disproportionate share of that investment? High-income people are the target market for the gold model, of course, and we know such people are typically willing to pay more than others for quality improvements of all sorts. Under Monday's pricing announcements, then, the buyers of the gold watch will be very same people who most value the innovative features embedded in it and all other versions of the watch. So it's only fair that they contribute more heavily to the investments that produced those features.
The pricing structure announced by Apple also promises better results for other members of the Apple community. Shareholders, for example, will benefit because it enables the company to capture revenue that would have otherwise gone to other sellers of expensive jewelry. Those who buy the entry-level watch benefit, too, because the company would not have been able to bring such a remarkably innovative product to market if it had been forced to sell every unit at the same price. And with a less attractive product, unit sales would be lower — quite possibly lower enough to require a higher uniform selling price. We also know that buyers of the premium models under current arrangements would be worse off in a parallel world without those models. They could have bought the cheaper versions, after all, yet freely chose not to.
Not everyone is thrilled — but not everyone has to be
The generally restrained reaction to Apple's pricing announcements doesn't mean that everyone was happy. Actress Anna Kendrick, for example, tweeted, "We should be thanking Apple for launching the $10,000 ‘Apple Watch' as the new gold-standard in douchebag detection."
An overly harsh judgment, perhaps? People buy expensive items for a variety of legitimate reasons. My late mother, who was frugal and by no means wealthy, once bought me a gold watch to mark a milestone birthday. It was a gift I treasured, in part because I knew what it symbolized for her.
No one has to buy any version of Apple's watch. If you think the watch isn't worth it, don't buy it.
Remember, no one has to buy any version of the Apple Watch. Although the company proudly announced that its offerings are the most accurate timepieces currently on the market, you can keep time perfectly well with a $30 quartz Timex, which in turn is more accurate than mechanical wristwatches that cost several hundreds of thousands of dollars. If you think Apple's watch isn't worth it, don't buy it. But the product has many remarkable capabilities besides keeping time. Ben Thompson — in my view the most insightful tech industry analyst writing today — sees it as a breakthrough in miniaturized computing that will, in time, significantly change our daily lives.
I'm probably not going to buy one this year. But I imagine I'll eventually buy the aluminum one. And when I do, I'll savor the fact that it's both better and cheaper because of how Apple priced the gold one.