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Wednesday, June 10, 2009

Buyers Be Aware: The Real Apple Premium

Luxury goods come at a high price. By being remarkably superior to the competition, consumers are willing to pay a cost premium simply because they merit the price. Apple revels in this business model, etching out a powerful niche in the PC market against which rivals cannot yet hope to compete.

Most Mac users testify to a peerless computing experience. Spurning the headache that is Windows, they are more than happy to pay an expensive premium for a superior product.

Yet there is much more to the superiority of Apple computers than meets the eye. That the Mac experience merits its price is only one half of the Apple premium.

The other half is unadvertised and often unthought of. It demands that users pay extra to help Apple uphold its market exclusivity, something vital in ensuring the superior Mac computing experience.

In this unusual and brilliant reversal, the Apple premium actually merits the product.

No one should buy a Mac unless they find both realities palatable.

Reality One: Product Merits Price
This post is not a piece of anti-Apple propaganda. Consumers are not mistaken to recognize the superior quality of Mac machines.

With little exception, Mac users say the computing experience more than justifies their investment. In a nutshell, the Apple experience is everything the PC is not. Macs promise to 'just work' out-of-the-box, retain its 'youth' over time, require little maintenance, and resist malicious attacks.

Many Mac users testify that, for the most part, these promises hold as advertised.

Deep down, no child hardened by the Microsoft age can be unmoved by such promises. For many, the Apple experience cures the persistent headache that is Windows. To them, Macs are not overpriced, but merit an expensive premium that is worth every penny.

It is hard to disagree with them. Besides, Macs are mad sexy.

Reality Two: Price Merits Product
In singing the Mac's praises, its secret ingredient to success is often overlooked: exclusivity in the PC market.

Mac computers are luxury products, occupying a tiny piece of the PC market pie. Yet, in the face of economic recession, Apple's high-rolling pricing strategy remains unchanged. Clearly the company is not interested in growing beyond the niche PC market where it dominates unchallenged.

This strategy may dumbfound economics students, but I suspect it is precisely what Apple wants.

In the PC world, a small market share translates into fewer external pressures. For one, it is a natural security shield against malicious software. It reduces the interest of third-party software developers, thereby minimizing end-user headaches and OS bloat. It also gives Apple more freedom to design and control its OS as it pleases.

In this view, a small market share is a matter of existential importance to ensuring the peerless Mac experience. It is perhaps why Apple must continue to charge high prices, even during an economic recession.

After all, why else would students buying an expensive Mac net them an iPod Touch freebie? Apple would try anything before a price drop.

That the high price of Macs puts a natural limit on the number of its adopters is no coincidence. The Apple premium, which some call the "Apple Tax," is what creates the exclusivity vital to the Mac's overall success.

Put another way, the Apple premium actually merits the product.

These realities, I suspect, are not lost on Steve Jobs. From the shadows of irrelevance, he shrewdly observed Windows come of age, noting its myriad strengths and weaknesses. A man of his brilliance must see that Apple can simply price itself above the storm that mires Windows, provided that consumers are willing to pay the premium.

To Jobs and company's great credit, many people can't be happier to buy into Apple's vision of the PC world.

An astute friend of mine likened Macs to a serene country club vìs-a-vìs Windows to an overcrowded public park. The analogy cannot be more apt. Paying the Apple premium does not only get you a good computer, but also residence in a digital gated community.

Having been a prospective buyer, I went as far as to put back-of-the-envelope numbers to this theory. With the baseline 17" MacBook Pro costing $2,500, I certify that it is entirely possible to get a comparably spec-ed, coupon-free Windows machine for $1,500, probably less. In this scenario, the Apple premium is $1,000 in total, of which $500 gets you a superior OS, able first-party apps, and a damn sexy machine.

The other $500 of that premium, of course, is your ticket into the Apple country club.

Prospective buyers should be aware that, while apt, the fallacy in this analogy is self-evident.

On the one hand, parkland is a fixed space and cannot be scaled to fit more people. Competing against free but overcrowded public parks, the expensive country club is merited by intrinsic value, namely open space.

On the other hand, in the digital world, the concept of open space does not exist. Virtual scalability is the name of the game; whoever scales better, faster, more ingeniously, wins. Just ask Google, Microsoft, or Wikipedia, all "public parks" who merited their success by scaling its services to as many users as possible.

Yet this is exactly opposite of the Mac business model. By pricing its machines as luxury goods, Apple thrives on high profit margins while limiting its user base. Platform scalability—the traditional yardstick for innovation in software engineering—is rendered nearly meaningless by the Mac's market strategy.

There is nothing unusual about the luxury goods business model, except that it is being applied to the PC industry.

Steve Jobs laughs in the face of Windows' struggles because, in a "country club," economies of scale are irrelevant. Apple can and will continue to thumb its nose at the industry, provided that enough willing people pay the Apple premium to keep the Mac club exclusive.

Personally, this strategy feels like a cop out for a premier OS developer like Apple.

Still, no matter how one looks at it, Steve Jobs is the only man who can eat off Microsoft's table. At present, Apple's strategy is brilliantly successful. The quality experience and soaring popularity of the Mac brand all but ensures its persistence in the foreseeable future.

My Conclusion
There is nothing wrong or evil about the Mac business model, or with paying the Apple premium to perpetuate it. Beyond question, Mac computers merit the price premium. Be aware, however, that the premium you pay is also meriting the product.

By paying the Apple premium, YOU erect the walls around the Mac gated community, making it serene and desirable. Apple only pours the foundation, and decorates walls better than anyone.

That Apple users have paid many hundreds extra to help Apple maintain its market exclusivity is not my idea of an honorable business model. It should be the producer's responsibility, not the consumers'.

In a sense, Apple passes the true cost of innovation on to the consumers, and it will do so until a worthy competitor emerges.

If you find this reality palatable, then by all means, buy a Mac. You won't be disappointed. Though bear in mind: in the amoral marketplace, you can feel a winner and yet be a loser all the same, both consumer and producer alike.