Why the Apple Watch can afford to cost thousands of dollars

Apple could learn a lot from Vertu's hyper-expensive phones

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Would you pay thousands of extra dollars for an Apple gadget made of gold?

Perhaps not, but the company is betting that at least some people will. Its Apple Watch Edition is made from 18-karat gold and will likely be very expensive — think thousands of dollars expensive — despite offering little to no extra functionality over the aluminum and steel models. Who would pay for such a thing?

Well, just ask Vertu.

A British manufacturer of ultra-premium phones, Vertu is the first nominally "tech" company to acknowledge the market for luxury electronics. It’s one of the first tech companies to understand that people don’t buy $4,000 Hermès handbags to improve their ability to carry things. (Leica is another.) Apple may have the high end of the conventional smartphone market almost to itself, but the Apple Watch Edition will be marketed to a well-heeled demographic of technology users that Vertu understands all too well. "These are people that will never even consider a watch that uses aluminum," says creative director Ignacio Germade of Vertu’s clientele. "Our customers aren’t satisfied with plastic or aluminum or a product that has Gorilla Glass. They want something that matches the rest of the products that they own. If they have sapphire on their watch, they want to have sapphire on their phone."

Vertu was founded as Nokia’s luxury arm but is now an independent venture after being spun off in 2012. The company makes several-thousand-dollar phones from lavish materials, each hand-assembled by a single worker who engraves their signature on every device. And by all accounts, Vertu turns a profit on these phones. Often a laughing stock of the technology industry, which finds it hard to comprehend any purchasing decision that isn’t based on the price-to-performance ratio, Vertu is actually well ahead of its time. As technology gets commoditized year on year, and brands like Samsung find it harder to stand out against the onslaught of cheaper products that offer most of the same experience, it’s the high end of the market with the most potential to thrive and differentiate.

Despite the high-profile hiring of fashion industry figures such as Angela Ahrendts and Paul Deneve, the iPhone 5S tie-up with Burberry last year, and the Apple Watch’s presence on the cover of Vogue China along with its preview event at the Colette boutique in Paris, Tim Cook spoke in October of the Watch’s warm reception from "people who know a lot about fashion and style." To read the subtext, Apple still doesn’t consider itself among those people. Just this week 9to5Mac reported that the company is actively attempting to hire fashion-conscious employees for its retail stores. Apple might not "know a lot about fashion" just yet, but it desperately wants to be stylish, because it knows that the high-end market is its best long-term — and most lucrative — bet.

Of course, Apple is closer to credibility in this space than any of its competitors. "It's the only tech company that ‘gets’ branding," says Martin Webb of Communion, a Tokyo fashion PR agency he founded after heading Marc Jacobs’ marketing in Japan. "Fashion people use Apple products because there are few stylish alternatives." Users of rival devices may bristle, but there’s undeniable truth to Webb’s words; walk into a Marc Jacobs store and you're unlikely to find many HTC One M8s. As far as phones go, at least, Apple has the casual fashion customer more or less wrapped up. But with the Watch Edition, the company will dive headfirst into the luxury market.

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Some commentators believe that the luxury pricing model doesn’t make sense for consumer electronics — particularly wearable gadgets, for which the technology is so nascent that anything released today could be obsolete within a few years. Noted Apple blogger John Gruber, for instance, wrote that the Apple Watch Edition will likely be expensive enough to blow the minds of spec-obsessed tech-heads, but nevertheless wondered if Apple might offer a trade-in program or make the watch’s internals upgradable so as to make it seem a more rational purchase or investment. Gruber’s thoughts are insightful, but on this point don’t go far enough — the Apple Watch Edition will never be a rational purchase or investment. It’ll be an emotional purchase made by the kind of person who wants the most luxurious experience possible in the here and now. "No one needs a Rolls-Royce — we are very open about that," the esteemed British carmaker told The Verge this year. "These are purchases of the heart."

"These are purchases of the heart."

"A phone is more, in a way, like a car," says Germade, when asked whether Vertu customers are concerned with technical obsolescence. "You don’t buy a luxury car because you want to buy it for the next 10 years or 20 years or 100 years; you buy a luxury car because even if you use it for two hours every three days, you want to have the best experience that you can have. If you look at the difference between when you buy a car and when you sell a car, you will realize that it’s actually a huge investment for a product that you use a few times a week." In other words, the kind of person willing to drop thousands of dollars on an 18-karat gold Apple Watch that performs the same as a $350 aluminum version is the kind of person willing to do that every couple of years as necessary.

"Take it to the next level, think about luxury travel," adds Germade. "You fly from London to Hong Kong first-class with your wife; that’s going to cost you more perhaps than one of our phones. And it only lasts 14 hours — why does it make sense? Because the experience of flying first-class is how you feel when you’re flying first-class. It’s not about ‘Oh my God I’m paying this money and it’s going to last me 20 years;’ it’s 14 hours and it still makes sense because of the intensity of the experience."

The technology industry is resistant to the idea of price being connected to anything other than technical performance, after decades of racing to the bottom in an attempt to attain mainstream acceptance. But these principles avoid the truth that well-made electronic products could be perfectly suited to a luxury audience. Mobile devices are the most important and personal item each of us carry every day, and wearable technology has the potential to skyrocket the intimacy we feel toward our gadgets. So why shouldn’t they be more personal, luxurious, and — yes — expensive? "The amount of usage you have with a mobile phone is nothing compared to any other product," points out Germade. "So do not try to do this comparison with purchasing a [traditional] watch and purchasing a mobile phone. You have to compare it to purchasing luxury experiences like hotels, like restaurants, like traveling, like cars. This is where you realize that it makes all the sense in the world." If Apple’s promise of "the most personal device we’ve ever made" comes to pass, and consumers start to see it as an essential part of their lives, an expensive Apple Watch targeted at the luxury market could make just as much sense as a Vertu phone.

But it’s unclear whether the Edition will be enough. It is, after all, almost exactly the same product as the $349 versions of the watch, materials aside. "I don't know what the price point is for the Edition, but I doubt it's going to qualify as a ‘luxury’ watch," says Webb. "Remember that high-end customers in the watch world are paying $75,000 to $250,000 or more," says Gene Stone, author of The Watch. "My sense is that the extra money people would pay would go more toward functionality than looks, i.e. ‘My watch can do things your watch can’t.’" With the same screen and form factor as the cheaper models, the Apple Watch Edition could struggle to gain credibility with luxury consumers.

Even if the watch itself is attractive, it’s hard to imagine many walking into a crowded Apple Store and making a multi-thousand-dollar purchase on the sales floor. Customer support is a big part of the Vertu offering, including 24-hour concierge services and personal contact with the manager of each boutique before the phone is even bought. "Of course the quality of the product matters, but the key point will be sales strategy, which is very different for luxury goods," says Webb. "[Apple] will have to build a team that can execute sales operations suited to HNWIs [high-net-worth individuals] in tandem with a sustained and sophisticated below-the-line marketing campaign." To put it another way, Apple’s knack for catchy TV ads isn’t going to help much with the type of customer it’s aiming to attract. It may need to rethink its retail experience altogether.

As the Apple Watch represents a new product category for the company, the Edition will be a tentative step into a whole new category of consumer. And even for Apple, which has better brand cachet in fashion circles than any technology company, it’s not clear whether wearable devices will take off with anyone outside the early-adopter gadget set. "If it’s not meaningful for people, it’s just a gadget," says Vertu’s Germade. "I’m personally not interested in gadgets and neither are our customers." While the Watch’s design is broadly appealing and the straps offer some level of customization, it might not be enough to overcome the fundamental fashion problem posed by everyone wearing the same thing on their wrist. "The straps are fun but they’re not going to give people that strange and somehow satisfying sense of owning something different from someone else," says Stone.

As with the iPhone, then, Apple’s first challenge with the Watch is to demonstrate how it will become an essential part of mainstream, modern life. That’s how Vertu can justify its prices to its customers — your phone is the most important object you own, in many ways, so why not make it as personal and special as possible? Apple would arguably be better off addressing the luxury market with the iPhone, a product that defined a category and changed the world. But as for the Watch? The jury is still out on whether regular people will want it, never mind whether others will spend thousands of dollars on it.

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