In recent years, Apple has consistently been a company that sells products at premium prices. In the markets that they serve, Apple almost always leads the rest on both price and profit per unit, by large margins. This often allows them to take the top position in total profit share despite not being the leader on total market share. So it’s unsurprising that Apple has gradually increased the prices of their products throughout the years. In the last 18 months or so, we saw a series of more drastic price increases from them across their product lines, which earned them quite a bit of criticism from the media and public. The criticisms can be easily found online. Most of them has good reasons and is more or less justified. Here though, I’d like to examine two reasons that could help explain the price premiums that Apple commands: cost of privacy-by-design, and cost of amortizing innovations that only pays off in the long-term.

All of the tech behemoths that touch our every day lives claim to value their users’ privacy, but Apple’s claim is the only one that is relatively believable in my opinion. Companies like Google and Facebook (and to a lesser extent, Amazon) make their living almost entirely on selling their users’ attention to advertisers, so as much as they try to respect their users’ privacy, it is still fundamentally at odds with their core business model. That leaves Microsoft and Apple, following the model of explicitly and directly selling users goods and services. Apple is the only one to believably have privacy-by-design as a core principle in their products.

Privacy-by-design, in this sense, means that a product is intentionally designed, at its core, to give as much privacy as possible to the end user. Apple’s version of this follows the saying of “trust no one, not even yourself”, as they simply do not collect¹ anything that they do not deem as absolutely necessary for providing the services that they do. And for the things that they have to collect, they try to do so in an anonymized way². This principle seem to permeate Apple’s products/services, and in some cases, extreme to a fault (in my experience at least³).

And I say that Apple believably does this not because I trust their words more so than others’ (although there is a case to be made for this, based on the differences in their core business models mentioned above), but because time and time again, this has been validated to be the case by independent sources. For example, the Google Data Collection Report from DCN in August 2018 shows (on page 24) that an iOS device sends an order of magnitude less data to Apple than an Android device sends to Google. My own data export audits also corroborate this story. The complete user data export that I’ve requested from Apple (which they are compelled by law to provide in full) is surprisingly sparse in information, compared to the same export from Google.

So what does all this have to do with higher prices? I don’t know whether or not privacy-by-design costs more to implement, but it is fairly obvious that it does significantly limit future indirect revenue, from the data collected. Suppose Google and Apple sold two devices with identical development/manufacturing cost, and are looking for the same amount of profit from them. Google, with its comprehensive data collection software running on its version of the hardware, can afford to sell the device at a lower price, because it anticipates years of future revenue to be generated as long as the user uses the device. Apple on the other hand, has no such revenue stream, so the initial upfront cost must be higher to compensate. Of course, this alone probably does not account for the entirety of the price premium that Apple charges, but it is definitely one of the things that contribute to it.

Another reason for the higher prices of Apple products comes from what I consider amortizing the cost of innovations that only pays off in the long-term. Some technology innovations require a significant amount of time (multiple years, a decade even) before any noticeable benefit can be seen. Of course most large technology companies will take on such projects, but Apple seems to be more willing than others to invest in these types of projects, even when the near-term payoff is minimal or even negative⁴.

A good example of this is Apple’s strategy to develop its own custom silicon in-house for iOS devices. The first few generations of iPhones used more off-the-shelf type ARM SoCs, but by the time of the introduction of the first iPad (as well as the iPhone 4), Apple had switched to their in-house custom designed A-series SoCs. This level of R&D effort cost Apple billions, and the initial payoffs were not very apparent. The early iterations of the A-series SoC performed on par with similar off-the-shelf chips, and it wasn’t until several years ago, starting with the A10 generation, that the advantages of these custom chips became clearer. Today, with these custom silicons, Apple is not only able to pull ahead of its competitors in mobile hardware performance, but is also able to bring the technology to the desktop computer market, in the form of the T-series security chips in Macs⁵.

The earlier iPhone buyers inadvertently helped pay for this, by buying phones with little (if any) hardware performance advantages for an inflated price. The cost of this long-term innovative custom silicon project was essentially amortized over the years, the benefits of which are not clearly seen for several years. There are probably similar such projects in development by Apple that the buyers today are helping pay for, the benefits of which are not realized, yet the costs are still being accounted for in the premium prices of the current products.

All else being equal, the more such long-term projects that a company undertakes, and the longer it takes for such projects to bear fruit, the more there is a need to charge higher prices for the products of today, in order to help with the costs.