When Apple announced the first iPhone in 2007, the thing that most amused Steve Ballmer, then the CEO of Microsoft, was the price. “Five hundred dollars?” he laughed. “That is the most expensive phone in the world!” Microsoft’s software was already in tens of millions of much cheaper phones. Analysts agreed that consumers who had already bought an iPod, a digital camera and a mobile phone were unlikely to want an expensive but limited combination of all three.
They were wrong, of course. The business of selling very expensive personal technology was just getting started. The original iPhone cost £440 in today’s money, while the latest iPhones cost from £849 to £1,749. Apple’s new Vision Pro virtual reality headset, announced yesterday, will cost $3,499 when it goes on sale next year (expect a UK price of around £3,500).
How did Apple make a success of the smartphone when it was so much more expensive than its competitors? Design, quality and marketing are clearly major factors, but it’s also true that the iPhone got lucky: in economic terms, it could hardly have been launched at a more opportune time. In the 18 months after it went on sale, the cost of borrowing in Western countries fell to a historic low, creating the conditions for a huge expansion of household debt. At the same time, central banks hosed new money into financial markets through quantitative easing (QE), which hugely inflated the value of technology companies that promised growth. It was not only that Apple had money to spend developing new products but that all the other companies around it – app developers, third-party tech providers, broadband companies – could raise more capital too, creating a boom around the iPhone.
The stated aim of QE was the “wealth effect”: by inflating asset prices (especially house prices) with new money, the Federal Reserve and the Bank of England caused people who owned assets (homeowners and shareholders) to feel better off, and to increase their spending. One of the things they spent that money on was the smartphone.
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With the Vision Pro, Apple is once more entering a market in which there is a well-established incumbent offering a much cheaper product. Meta – the owner of Facebook – claims to have sold almost 20 million VR headsets and its latest model (the Meta Quest 3, announced last week) will retail for $499.
Once more, this is a technology that has been waiting some time to be popularised. Ten years ago, as a technology reporter, I tried on a pair of normal-ish glasses (the arms were thickened) that overlaid simple graphics into my field of view. It does seem likely that this technology will eventually replace our current world of flat displays, and it’s easy to see why companies built on monopolising our attention are staking their future on its success: it’s a screen from which you can never look away.
And once more, it may be that economic conditions are on Apple’s side. Times are tough for many people, especially those on lower incomes, who have been battered by the economic effects of a global pandemic and then a huge rise in inflation, which is most serious for those who can least afford it. For the people who might have $3,500 to spend on some VR goggles, however, it’s a different story: for the wealthy, the pandemic meant an asset-price boom as yet more QE was administered, and inflation – while it nibbles at their disposable income – is giving a boost to their savings.
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The result has been a huge boom in the sort of overpriced baubles enjoyed by the lucky few. Last month Bernard Arnault, the owner of LVMH – the world’s largest luxury goods company, owner of many of the most recognisable fashion houses, drinks brands, jewellers and perfumiers – was named the world’s richest person by Forbes. In the past year Europe’s ten biggest luxury companies have accounted for 30 per cent of market returns.
What the Vision Pro recognises, then, is that the consequences of the pandemic are “k-shaped”: the purchasing power of wealthier consumers is rising as that of poorer people falls– and high prices are even less of a barrier to adoption than they were in 2007. I’d be surprised if the Vision Pro isn’t a brilliant example of a potentially transformative technology. But while it is a grand and exciting bet on virtual worlds, it is also a bet on hard economic reality.
[See also: Life after Apple]