Tag: Metaverse

The Economics of Apple’s Vision Pro

Photo from apple.com.

On Friday, February 2, Apple released Vision Pro, its long-awaited, much discussed virtual reality (VR) headset. The Vision Pro headset allows users to experience either VR, in which the user sees only virtual objects, as for instance when the user sees only images from a video game; or augmented reality (AR), in which the user sees virtual objects, such as icon apps or web pages superimposed on the real world (as in the two photos below). Apple refers to people using the headsets as being engaged in “spatial computing” and sometimes refers to the headsets as “face computers.”

Photo from Apple via the Wall Street Journal.

Photo from Apple via the Wall Street Journal.

Vision Pro has a price of $3,499, which can increase to more than $4,000 when including the cost of the insert necessary for anyone who wears prescription eyeglasses or contact lenses and who chooses to buy additional storage capacity. The price is much higher than Meta’s Quest Pro VR headset (shown in the photo below), which has a price of $999.

Photo from meta.com.

In this post, we can briefly discuss some of the economic issues raised by the Vision Pro. First, why would Apple charge such a high price? In her review of the Vision Pro in the Wall Street Journal, Joanna Stern, the site’s personal technology writer, speculated that: “You’re probably not going to buy the $3,500 Apple Vision Pro. Unless you’re an app developer or an Apple die-hard ….”  

There are several reasons why Apple may believe that a price of $3,499 is profit maximizing. But we should bear in mind that pricing any new product is difficult because firms lack good data on the demand curve and are unsure how consumers will respond to changes in price. In our new ninth edition of Economics and Microeconomics, in Chapter 6 on price elasticity we discuss how Elon Musk and managers at Tesla experimented with the cutting the price of the Model 3 car as they attempted to discover the effect on price changes on the quantity demanded. Managers at Apple are in similar situation of lacking good data on how many headsets they are likely to sell at $3,499.

If Apple lacks good data on how consumers are likely to respond to different prices, why pick a price four times as high as Meta is charging for its Quest Pro VR headsets?

First, Apple expects to be able to clearly differentiate its headset from Meta’s headset. If consumers considered the two headsets to be close substitutes, the large price difference would make it unlikely that Apple would sell many headsets. Apple has several marketing advantages over Meta that make it likely that Apple can convince many consumers that the Meta headset is not a close substitute for the Vision Pro: 

  1. Apple has a history of selling popular electronic products, such as the iPhone, iPad, Air Pods, and the Apple Watch. It also owns the most popular app store. Apple has succeeded in seamlessly integrating these electronic products with each other and with use of the app store. As a result, a significant number of consumers have a strong preference for Apple products over competitors. Meta has a much more limited history of selling popular electronic products. For instance, it doesn’t produce its own smartphone.
  2. Apple has an extensive network of retail stores inside and outside of the United States. The stores have been successful in giving consumers a chance to try a new electronic product before buying it and to receive help at the stores’ Genius Bars with setting up the device or dealing with any later problems.  Meta operates few retail stores, relying instead on selling through other retailers, such as Best Buy, or through  its online site. For some consumers Meta’s approach is less desirable than Apple’s.

Second, as we discuss in Economics and Microeconomics, Chapter 15, Section 15.5, charging a high price for a new electronic product is common, partly because doing so allows firms to price discriminate across time. With this strategy, firms charge a higher price for a product when it is first introduced and a lower price later. Some consumers are early adopters who will pay a high price to be among the first to own certain new products. Early adopers are a particularly large segment of buyers of Apple products, with long lines often forming at Apple stores on the days when a new product is released. That firms price discriminate over time helps explain why products such as Blu-ray players and 4K televisions sold for very high prices when they were first introduced. After the demand of the early adopters was satisfied, the companies reduced prices to attract more price-sensitive customers. For example, the price of Blu-ray players dropped by 95 percent within five years of their introduction. Similarly, we can expect that Apple will cut the price of Vision Pro significantly over time.

Third, because Apple is initially producing a relatively small number of units, it is likely experiencing a high average cost of producing the Vision Pro. The production of the components of the headset and the final assembly are likely to be subject to large economies of scale. (We discuss economies of scale in Economics and Microeconomics, Chapter 11, Section 11.6.) Apple hasn’t released information on how many units of the headset it intends to produce during 2024, but estimates are that it will be fewer than 400,000 and perhaps as few as 180,000. (Estimates can be found here, here, and here.) Compare that number to the 235 million iPhones Apple sold during 2023. We would expect as Apple’s suppliers increase their production runs, the average cost of production will decline as Apple moves down its long-run average cost curve. As a result, over time Apple is likely to cut the price.

In addition, when producing a new good, firms often experience learning as managers better understand the most efficient way to produce and assemble the new good. For example, the best method of assembling iPhones may not be the best method of assembling headsets, but this fact may only become clear after assembling several thousand headsets. Apple is likely to experience a learning curve with the average cost of producing headsets declining as the total number of headsets produced increases. While economies of scale involve a movement down a static long-run average cost curve, learning results in the long-run average cost curve shifting down. This second reason why Apple’s average cost of producing headsets will decline contributes to the liklihood that Apple will cut the price of the Vision Pro over time.

Finally, we can discuss a key factor that will determine how successful Apple is in selling headsets. In Chapter 11 of the new ninth edition of Economics and Microeconomics, we have a new Apply the Concept, “Mark Zuckerberg … Alone in the Metaverse?” In that feature, we note that Meta CEO Mark Zuckerberg has invested heavily in the metaverse, a word that typically means software programs that allow people to access either AR or VR images and information. Zuckerberg believed so strongly in the importance of the metaverse that he changed the name of the company from Facebook to Meta. The metaverse, which is accessed using headsets likes Meta’s Quest Pro or Apple’s Vision Pro, is subject to large network externalities—the usefulness of the headsets increases with the number of consumers who use them. The network externalities arise because many software applications, such as Meta’s Horizon World, depend on interactions among users and so are not very useful when there aren’t many users.

Meta hasn’t sold as many headsets as they expected because they have had difficulty attracting enough users to make their existing software useful and the failure to have enough users has reduced the incentive for other firms to develop apps for Meta’s headsets. Initially, some reviewers made similar comments about Apple’s Vision Pro. For instance, even though streaming films in 3D is one of the uses that Apple promotes, some streaming services, including Netflix and YouTube, have not yet released apps for Vision Pro. Some important business related apps, such as FaceTime and Zoom, aren’t yet available. There are also currently no workout apps. As one reviewer put it “there are few great apps” for Vision Pro. Another reviewer wondered whether the lack of compelling software and apps might result in the Vision Pro headset suffering the fate of “every headset I test [which] ends up in my closet collecting dust.”

So, a key to the success of the Vision Pro will be the ability of Apple to attract enough users to exploit the network externalities that exist with VR/AR headsets. If successful, the Vision Pro may represent an important development in the transition to spatial computing.

Microsoft Buys Activision

Photo from the Wall Street Journal

When a firm decides to expand, it has two main choices: 1) Grow internally, or 2) grow by purchasing (or merging with) another. When Microsoft decided to increase its ability to produce and distribute video games, it chose to grow by acquiring Activision Blizzard, maker of Call of Duty and World of Warcraft among other games. Microsoft’s main objective in buying Activision was to increase the number of games it would have available on its Game Pass cloud-based game streaming service.

Traditionally, people have played video games like Call of Duty on video game consoles like Microsoft’s Xbox or Sony’s PlayStation. This arrangement is similar to how at one time many people watched movies on DVD or Blu-ray players. Today, more people stream movies by subscribing to streaming services like Netflix, Amazon Prime, or Disney+. With these cloud-based movie streaming services, people watch movies on their computers, tablets, or smartphones without having to download them.

With Game Pass, Microsoft is trying to bring the streaming model to video games. If successful, gameplayers would no longer need a video game console, being able to instead play the game on any internet-connected device, including a smartphone.  So far, cloud-based gaming has been growing fairly slowly because games contain much more data than do movies, which makes it more difficult to adapt them to streaming. Microsoft hopes that after successfully converting Activision’s popular games to streaming, it will give a boost to its Game Pass service. 

Microsoft also indicated that it acquired Activision to help it expand its ability to offer products in the “metaverse,” which is a so far not fully developed version of the internet in which people can interact using augmented reality or virtual reality. Most industry observers believe that given that at this point few metaverse services and products are available, the contribution of Activision to the expansion of Game Pass was likely Microsoft’s main motivation in acquiring the company.

Microsoft’s acquisition of Activision would appear to benefit consumers because it would allow them to stream Activision’s games. Prior to being acquired, Activision apparently had no plans to launch its own game streaming service. In that sense, the acquisition brought together a firm with a popular product (video games) and a firm that had a better way of distributing the product (Game Pass). Still, some industry observers wondered whether the acquisition might lead to an antitrust investigation by either the Antitrust Division of the U.S. Department of Justice or the Federal Trade Commission. (We discuss antitrust policy in Economics and Microeconomics, Chapter 15, Section 15.6.)

Antitrust investigations are most common when two firms in the same industry merge because that type of horizontal merger raises the possibility that the new, larger firm may have greater market power, which would increase its ability to raise prices.  Microsoft’s acquisition of Activision is an example of a vertical merger, or a merger between firms at different stages of the production of a good or service. Activision’s game content would be combined with Microsoft’s Game Pass system of distributing games.

The federal government doesn’t typically challenge vertical mergers because they rarely impose a burden on consumers, as horizontal mergers may. But officials in the Biden Administration have promised stricter scrutiny of mergers involving large tech firms, like Microsoft. In response to the possibility of antitrust action against its acquisition of Activision, Microsoft argued that it wouldn’t “be withdrawing games from existing platforms, and our strategy is player-centric—gamers should be able to play the games they want where they want. We believe this acquisition will only increase competition, but it is ultimately up to regulators to decide.” 

Sources:  Kellen Browning, “It’s Not Complicated. Microsoft Wants Activision for Its Games,” New York Times, January 19, 2022; Cara Lombardo, Kirsten Grind, and Aaron Tilley, “Microsoft to Buy Activision Blizzard in All-Cash Deal Valued at $75 Billion,” Wall Street Journal, January 18, 2022; Sarah E. Needleman, Wall Street Journal, January 20, 2022; and Stefania Palma, James Fontanella-Khan, Javier Espinoza, and Richard Waters, “’Too Big to Be Ignored’: Microsoft-Activision Deal Tests Regulators,” ft.com, January 22, 2022.