Erik Ableson 3 minute read
March 13, 2015

Edition issues

Edition issues

I’ve been standing on the sidelines of discussions surrounding the Apple Edition Watch and the pricing, listening to points varying from the tech world’s point of view where value is derived uniquely from functionality, and their total incomprehension of markets that function differently, to the luxury watch world where value is derived from craftsmanship and the cost in person-hours, to the concepts from the fashion world surrounding things like Veblen goods and learning a lot.

I would just like to bring up a thought that occurred to me this morning about how much of the discussion surrounding the cost of goods and how this is such an incredibly limited method of analysis as a predictor of the eventual sale price of an object. This was underlined to me while reading a wonderful analysis of the videos Apple is showing about the manufacturing techniques they are using to produce the watches.

What this signaled to me is that there are complexities, costs and investments in the manufacturing process that go far beyond the raw materials costs that need to be accounted for. Granted, for some of these systems, Apple is working at such an incredible scale that these inputs can sometimes be marginalized when considered on a cost per unit basis, but the Edition presents a special case which will clearly never be production at the scale of any other product made by Apple.

And there’s one more thing…

The elephant in the room is simply this: It’s made of gold. Gold is both incredibly valuable on a price/weight and is also universally exchangeable. Many of the components in a modern smartphone, like individual chips and so on are probably higher value on a cost/weight valuation, but they are only valuable to the greater market when assembled into a final product.

Which means that it’s very likely that there is an entirely separate production chain and set of facilities set up specifically for managing these new risks, which brings the investment on a cost per unit up even higher. This also means more in depth security and background checking on the personnel that will be working in these facilities.

Gold as a major component to a product represents a hugely complicated security risk at all points in the production chain. This is an incremental cost that needs to be addressed from the source where gold is purchased and then transported to the factory where the gold is melted, converted to flattened ingots and then into blanks. From there the blanks will be taken to the facility where the machining is done (I find it doubtful that these processes are done on the same site), noting that anything dealing with machining produces swarf only in this case, the swarf is valued at $800-$1000/ounce rather than the commodity pricing of aluminum. Not to mention that even if I recover a couple of pounds of aluminum by putting sweepings in my pocket, the available marketplace for reselling it remains limited.

Then we have the additional security through all of the following stages of stocking and transporting and then additional security at the store level. This is a non-negligeable cost factor that pretty much all of the discussions are ignoring. The watch people ignore it because it’s second nature to them and therefore obvious, the tech press ignores it because it’s so outside of the scope of the way the world works for them.

Remember, like all products, the cost is greater than the simple sum of the parts.