The more an Apple product is worth, the more you want one

Veblen goods

Thorstein Veblen was an American economist who noted the conspicuous consumption of the 19^th century Gilded Age.

Veblen argued that the point of such consumption was to simply to show that you were able to consume needlessly – showing off, but showing a specific level of taste, income or knowledge. This is much the same as today’s Shoreditch crowd sporting ever more fantastical shaves done by this “Just fantastic, old-school barber”.

Economists refer to Veblen goods as things which are more desirable as their price increases. Not desired (we’ve all drooled over the Ferrari showroom), but desirable.

A Veblen good allows you to show that you’re rich, sufficiently switched on and definitely part of the cognoscenti. All of which rather describes certain fanboy approaches to the latest iPhone. 

Which is where Apple is making all those profits, of course. If an item is more desired, the higher the price – then you can add a fairly juicy profit margin to it. It’s even possible that the absence of a solid mark-up will reduce your sales. This is where we find Apple’s handsets, for while there’s been a little bit of compression in recent years, net margins of 40% have been detailed.

The trick here is to be able to create something that becomes a marker of that social or financial success. Branding does this, or at least that’s what a brand is attempting to do. My suspicion is that Apple has been realising over the years quite how successful it has been in this manner, which is why price points seem to be trending upwards for the top-of-the-line models. If more expensive is better for the consumer, then why not oblige them?

Market valuations

Which is what leads us to why Apple is the most valuable company in the world, the first trillion-dollar one. We’re in a capitalist system, one that works on profits made by collecting the value added to inputs.

A brand – or better, a Veblen Good – means that such profits can be high without damaging sales volume, and can even increase them. Then find 40 million people every financial quarter who desire that very item and there we are.

There’s one more thing about this sort of valuation – markets are forward looking. The capital value of the company is not based on profits this quarter, nor sales. Rather,  it is based on what those tell us or indicate to us about future sales and profits.

This is why a sales miss – such as those that Facebook and Pandora have suffered – can lead to such large movements in a firm’s valuation. It isn’t just the quarter or year, but that stream of profits from the next two decades which is incorporated into the share price. We are highly leveraged between current operating results and corporate valuation.

This works both ways. A stunning set of results can rocket a share price, just as a stutter can cripple it. As a technical detail, it is about 20 years into the future that the market prices took into consideration. A useful discount rate is 7% or 8%, meaning that year 21 estimations make very little difference to current price.

It’s entirely true that Apple is the first trillion-dollar company, but that only really works if we ignore inflation or relationships between company value and the size of the economy.

There have been much larger companies in the past. The how of Apple’s becoming the first trillion-dollar company was down to it being able to (luck in? Successfully create?) produce that item of conspicuous consumption, the iPhone.

The more expensive it is, and known to be, then the more it shows off the status of its owner. Such a creation can carry a hefty profit margin, and given that we’re in a capitalist world, where it is profits that matter, this will lead to high corporate valuation.

It’s damned hard to do and near no one knows how to do it by plan, but there’s no mystery to what has been done.