This piece was updated on August 2, 2018 to reflect news of Apple’s $1 trillion valuation.
Over the course of the past several decades, a unique phenomenon has arisen out of general societal connectivity: network effects. Their definition is simple — a network, unlike an excludable good, increases in usefulness as more people use it. Though seemingly simple, this idea is, in fact, profound. For millennia, humans fought over scarce resources to survive. If you were able to obtain a scarce resource, by definition, that was one unit of said resource that could not be used or consumed by another individual. The playing field, then, was “zero-sum” — there would inevitably be one winner and one loser in the fight over one unit of a scarce resource. As more people joined that fight, they became objectively worse off. Networks, to their credit, have flipped that idea on its head; instead of increasing competition among individuals for scarce resources, access to said resources — both in terms of cost and general ease — is improved in proportion to the increase of individuals within the network.
Uber is a perfect example. Their business model is to connect riders (consumers) with drivers (producers) as quickly and cheaply as possible. To do this, they must control one, fundamental piece of the equation: demand for rides. Once Uber aggregates a critical mass of riders (assumed, for the sake of the example, to be more than are using any other platform), their platform becomes objectively more valuable to drivers, whose main objective is to complete as many rides as possible. This incentivizes more drivers to favor Uber’s platform because it is more profitable, which drives down the cost of rides for consumers, and makes those on the margin more likely to opt for Uber over a more expensive competitor.¹ It is clear, then, why Uber’s PR crisis — including the #DeleteUber campaign — was and is a nightmare for the company: when a platform’s power rests in the loyalty of its users, anything that threatens to erode that loyalty is an existential threat.
Though Uber is an excellent example of a business that benefits from network effects, there are many others: think Airbnb for vacation rentals, eBay for online auctions, Amazon for e-commerce, etc. It is true, then — businesses that effectively leverage network effects tend to succeed. However, the company leveraging them best may also be the company whose network effects have been most overlooked; a company that has flown under the radar while remaining extremely visible the entire time; a company whose watch tracks my workouts, whose phone connects me to my life, and whose computer I am using to write this article. That company is Apple.
To understand the network effects that are unique to Apple, it is first necessary to understand Apple’s success. This, of course, requires understanding and acknowledging that Apple is not a technology company, but rather a luxury brand. In fact, to claim Apple is anything other than that is to fundamentally misunderstand the market in which Apple plays. It is also to ignore the rationale behind what was perhaps one of the savviest business moves of all time: the establishment of retail stores.
To use an Apple device is to imagine yourself as something greater — something closer to the unattainable, or the divine — and an Apple store is as close as you can get without truly committing to a purchase.
At a time when many brands were moving away from retail, Jobs invested in the design and construction of great houses of worship to Apple — churches, some might say. In the same way that true churches used to, they invoked within people a feeling that they were closer to the divine simply by entering. To walk into an Apple store is to understand what this feels like — the curved (stained) glass windows, the savvy, casually dressed employees (priests and priestesses), the tables on which working examples of coveted devices sit, waiting to be engaged with (shrines, altars). All of it contributes to a sense of elevated consciousness, that the store you’re in is making you better simply by being within its confines.
Hundreds of years ago, churches were said to contain relics — oftentimes, bits of clothing said to have been worn by especially holy figures, such as Saint John the Baptist, or Jesus Christ himself. Churches of old were places of worship because it was believed that proximity to said relics was akin to proximity to God. To call Apple stores “churches,” then, is not wrong, but rather right. To use an Apple device is to imagine yourself as something greater — something closer to the unattainable, or the divine — and an Apple store is as close as you can get without truly committing to a purchase. The “church” metaphor is also ironic; the items that made holy the churches of old were called “relics,” and the items that make holy the experience within an Apple store are anything but.
A $1,149 price tag for the best phone on the market reminds its owners why they can afford it, and reminds those who don’t why they can’t.
Apple is not the only beneficiary of the network effects exclusive to luxury brands, but it is the only brand that has been able to enjoy luxury profit margins at the scale it does. It is important to acknowledge, too, that there are two different types of network effects that Apple enjoys. First, there’s that which comes by nature of being a luxury brand. In the fourth quarter of 2017, sales of iPhones accounted for 18% of global smartphone sales and yet accounted for over 87% of profit within the global smartphone market. Second, Apple reaps the profits that come as a result of users operating within the Apple ecosystem.
A Network of Luxury
The first type of network effect is one that luxury brands have enjoyed since their inception — that is, the brand increases in value as more people of a certain ilk affiliate themselves with it. This is important because it differentiates Apple’s luxury status network effect from that enjoyed by Uber, or similar companies; whereas Uber becomes more valuable with each individual it adds to its network, Apple becomes more valuable by adding a certain type of consumer to theirs — the type that doesn’t need to think about where $1,149 for a new phone is going to come from, or perform a cost-benefit analysis on paying an extra $150 for an extra 192 gigabytes of internal storage. This is the same type of consumer who, upon walking into an Apple store, makes everyone feel better about themselves simply by being there.
“What’s the best one?”
“The 256 gigabyte X.”
“Okay, I’ll get one of those.”
“Here’s my card.”
$1,149 for the best phone on the market is certainly a signal that the phone is actually that good; I’ve had it for a year and its performance has been nothing short of extraordinary. And yet, $1,149 for the best phone on the market is more than that — it reminds its owners why they can afford it, and reminds those who don’t why they can’t. “Yes,” Apple appears to be saying to those balking at the price tag, “The X really is that good. It also isn’t for you.” That is the profundity of being a luxury brand — exclusivity serves as less of a reminder of the product, and more of a reminder of the kind of people who have it. It is also why the iPhone X — a device that may go down as the greatest iteration of the greatest consumer good of all time — can command a larger profit margin than almost any device in history, and every device in its class.
Of course, there will be those who cannot afford it but make the purchase, just as there will be those who could afford it many times over, but don’t. This does not affect the brand.² As with anything luxurious, much of the actual luxury is embedded within exclusivity. As long as the purchase of any Apple product is a clear stretch for those without the means, most of those on the margin will opt against making it, but not without aspiring to eventually make it. They will leave space for a majority with means to do so — a majority that shops, dines, travels, and lives unconstrained by the boundaries that govern the rest of us. Apple is an aspirational brand that benefits from ownership of an exclusive network of individuals living a lifestyle unavailable to the rest of society. It is unsurprising, then, that analysts have pointed to Apple’s status as a luxury brand to explain why, today, it became the first company to ever obtain a trillion dollar market capitalization. With that type of success, there is zero reason to market to anyone else.
A Network Within the Luxury Network
The second network effect Apple enjoys is similar to that enjoyed by a company like Uber. On top of Apple’s status as a premier luxury brand, it also has the unique distinction of offering services that improve with each additional user. An example would be iMessage, a closed ecosystem of communication that treats users to a data-free message experience, yet works only when the messages that are exchanged come from two devices that are iMessage capable — and, of course, only iPhones are.³ If even one person in a group message of a dozen people is utilizing a device other than an iPhone, all incoming messages turn from a pleasant blue to a much less pleasant green, or, put another way, the entire ecosystem is thrown out of balance. It only takes one bad apple to spoil the bunch, as the saying goes, and Apple’s lack of assurance that everyone knows the culprit’s identity is almost worse than if they made it abundantly clear. To be the one with the non-iPhone is to be the one who passed gas in a packed elevator. Knowing you are the reason for the tension is discomforting in the highest degree, and you’d do anything for a quick fix. Of course, Apple has one: buy an iPhone.
The services Apple offers beyond iMessage are also beneficiaries of network effects, but perhaps more important than individual services are the overall network effects Apple’s services create within the Apple ecosystem — that is, each product or service that Apple conceptualizes, designs, and then releases improves the user experience for every other product within said ecosystem. The newly cellular-capable Apple Watch has significantly improved the iPhone UX — ironically, because it has allowed many to use the latter less — and has given further functionality to the already beloved AirPods. Similarly, Apple’s services — Apple Music and iCloud, to name a few — are uniquely⁴ enabled and utilized by Apple hardware: Apple Music because of its seamless integration with said hardware, and iCloud because it relieves storage pressure on said hardware and gives users more control and flexibility within the Apple ecosystem.
Finally, Apple is incredibly adept at releasing features that will not be fully realized for years, or omitting features to prompt positive paradigm shifts. Apple’s omitting the headphone jack was a perfect example of the latter. The headphone jack was one of the few remaining ports that was almost universally adopted by both consumers and producers, and Apple nixed it without a second thought. Most consumers, of course, voiced frustration — the transition was neither seamless nor cheap, and Apple’s grand solution, their paradigm shift — the AirPods — was not ready upon the release of the jack-less iPhone 7. Even so, upon release, AirPods were backordered immediately, not necessarily by people who weren’t complaining, but by the people who were — such is the power of the Apple brand.
Those people — who complained, but complied — are the same people who complain but comply when their trainer tells them to do an extra set at the gym, or run an extra mile on the treadmill. They do this out of the understanding that they’re being led down a path to something better. The price paid to reach the end of that path needn’t matter, because it is dwarfed by the tangible and intangible value of whatever’s at the end. For those paying the price to upgrade from one flagship device to another, or to realize one of the many paradigm shifts that Apple has caused throughout the years, price isn’t a barrier to the sale — it is simply another piece of the experience.
Apple’s willingness to omit features that have been integral not only to their products, but to the industry as a whole, suggests a reason for the company’s success — when you’re the industry leader, you lead, and the indicator of any great leader is the ability to make the unpopular decisions that, when reviewed in history books, seem like obvious ones. It also makes clear to those who are frustrated by having to continually pay to upgrade their hardware that they are on the fringe of Apple’s target demographic; Apple products are, after all, expensive, and the people who can purchase them year over year are not unlike those who frequent the luxury stores that line Rush Street in the so-called “Viagra Triangle” of Chicago’s Gold Coast — stores with employees who haven’t been asked the price tag on an item in years, and if they have, they likely reminded the patron, however politely, that if they are asking about price they probably can’t afford it.⁵
Given all of this, it is possible that, eventually, Apple will have built a brand so detached from the trials and tribulations of the everyday consumer that to own an Apple product, or live in the Apple ecosystem, will be to exist in an entirely new class of society. It is hard to imagine that Apple has truly designed their products with this in mind — any company whose aim is the bifurcation of society evidently has some soul-searching to do. And yet, it may be truer than we know. Apple is the only company ever to benefit from the network effects enjoyed by both luxury brands and tech companies more generally; their brand is ubiquitous, yet inaccessible, and it becomes more and more aspirational with each passing day. It is that combination of scale and profit margin that has contributed to a trillion dollar market capitalization and global following. The combination of exclusivity, network effects, and scale appears to give Apple a stranglehold on the market. Though these strengths may eventually become weaknesses, it is hard to envision that future.
Acknowledgements: Thanks to Yuval Noah Harari, Scott Galloway, Ben Thompson, James Allsworth, and David Perell for inspiring the thoughts that lead to articles like this. Thanks also to David Perell for his feedback.
¹ Assuming, of course, that price is the sole factor governing consumer choice of which ride-sharing application to use. If there’s anything the #DeleteUber movement taught us (or retaught us), it is that this is not always the case, even for homogenous goods, like rides from point A to point B.
² Apple discontinued the iPhone 5C — their one attempt to go downmarket — not long after release.
³ Technically, any Apple device is iMessage capable (iPads, MacBooks, etc.).
⁴ Though not exclusively — Apple Music is available on PCs, but the experience is undeniably best when integrated within the Apple ecosystem.
⁵ Apple has a solution to that, too: the iPhone upgrade program.