Is Apple Exploiting Consumer Irrationality?

John Nocera’s Sunday column ($$) attacks Apple for its business practices. Two in particular raise Nocera’s ire: (1) hiding Apple’s customer support number; and (2) building iPods that have relatively short usable lifespans. Nocera notes that Apple will repair iPods that die within the good’s one-year warranty, but suggests (through a source) that the device’s natural life is “just a hair longer than the warranty.”

Nocera claims that customers expect their devices to last a “good long time,” and we are “just not conditioned to believe that a $300 or $400 device is disposable.” But he admits having bought six iPods in the last five years, three of which were replacements, suggesting that at least one customer has been conditioned as to the device’s disposability. My own experience (3 iPods purchase; 2 replacements; 1 repair under warranty) are similar. I imagine that there are millions of Americans who are gradually learning that when you stuff increasing numbers of gizmos into increasingly smaller gadgets, friction makes for trouble in the motherboard.

But Nocera might be right in his implied argument that consumers are behaving irrationally by ignoring evidence like this, which would explain Apple’s growing market strength. The optimism bias is among the most robust of the cognitive tics exposed by experimental behavioral law and economics literature. We consistently underestimate the likelihood of bad things happening to us. So, although Apple’s one-year warranty suggests a steep product failure curve at month 13, we discount that risk in our purchase decision. This optimism is no doubt enhanced by Apple’s careful packaging, which makes it look like they’ve taken a swiss-like level of care in their manufacturing process, and iPod’s high-price, which suggests quality. That is, iPod’s effective life is a classic example of an experience good. Consumers are unable to determine the life of an iPod by looking at Apple advertisements (cf. price, design) and therefore they turn to Apple’s brand value to determine how long the iPod will last.

This analysis suggests that so long as Apple retains its brand – expensive, low-defect, attention to detail – it will continue to convince consumers to buy products with lower-than-expected lives. Competitors would be well advised to directly attack this brand. Why haven’t they succeeded?

Nocera thinks that one explanation is that folks are locked into iTunes, having spent time and money building a proprietary library through the software. This sounds like the beginning of a tying claim to me (although they better file quick, while patent-tying is still a strong antitrust theory.) But is a strange argument, because as I see it, iTunes has triumphed by virtue of its superior product characteristics, over an alternative format (WMP) that was supported by a titular monopolist! (I imagine that folks have thought about bringing an an implied UCC warranty claim for failure to serve a particular purpose – i.e., long term use – but that claim would be a stretch, at least on first glance.)

I obviously have mixed feelings about Nocera’s column. On the one hand, I concede that consumers are vulnerable to being misled about the life of the iPod. On the other hand, I love my iPod, even though I know it is not long for the world, and will buy another when it dies.

[UPDATE: Josh Wright responds here. Shorter version: the market will clear.]

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6 Responses

  1. Frank says:

    Great post, though I’m not as conflicted as you. The success of the iPod is a great example of network effects, which should merit just as much antitrust scrutiny as Microsoft’s OS got in the mid-1990s. I’ll develop that point via an anecdote.

    I got frustrated by my first iPod, a piece of junk that barely worked. So I switched to a Dell, which was a good player (still works!), but connected to a terrible piece of software (MusicMatch).

    Meanwhile, a billion dollar iPod “ecosystem” (see NYT story of last week) developed, promising every imaginable type of accessory to make PodPeople’s life a breeze. (I even got a Prada iPod holder as a joke gift.) Podcasts emerged, all organized intuitively on the iTunes MusicStore, and are conveniently updated by its software. So by the middle of ’05 I was back to the “piece of junk,” and when it conked out, I got a new iPod.

    But far from leading us to celebrate the iPod, such developments should spark skepticism and concern about Apple’s business practices. As James Boyle’s brilliant FT article “The Apple of Forbidden Knowledge” suggests, Apple’s tactics here are just Microsoft-style monopolizing writ small. It’s using DRM to lock people into iTunes, using iTunes to lock people into its players, and who knows when they might suddenly decide to leverage that dominance into an effort to force all iPod users to buy Macs? “Just buy a Mac desktop” was suggested to me more than once by the guys at the ironically named “Genius Bar” at my local Apple store.

    Interoperability should be a paramount goal for the digital economy. To the extent Apple uses its dominant position to thwart it, it deserves scrutiny under the relevant competition laws.

  2. Podesta says:

    Nocera’s problem is twofold:

    •His family is unusually clumsy.

    •He does not buy extended warranties but expects to be treated as if he does.

    Most broken iPods are under warrranty, either the original one-year or an extended warranty. Nocera chose to be in the situation he is in by not buying an extended warranty.

    Nocera’s attempts to shift the blame to Apple are unconvincing. This situation is his fault.

    Interestingly, his column is part of the NYT’s relatively new paid content program. An equivalent argument could be made that since we got used to reading NYT content free, Nocera should publish his column without the paid content restriction. After all, that is what we consumers had come to expect.

    Frank’s biased remarks read like astroturf from Microsoft. Windows DRM is no less offensive that Apple’s, if one considers DRM offensive. Yet, Frank somehow forgets to mention it.

  3. venson says:

    sometning is better then nothing.

  4. Mac Lover says:

    Please. You shouldn’t have to buy an extended warranty for a product to last more than one year! We’ve always loved macs and apple, but we’ve had the same ipod experience — it lasted just over a year, and started to crash — now is dead. I completely agree; you spend that much for a little thing, you expect it to last longer, and don’t expect to have to pay more for an extended warranty

  5. Bill says:

    Couldn’t agree more with Mac lover. My IPOD crapped out on me after two years. I am holding off buying a new one due to Apple’s indifference with my situation. Good manufacturers and retailers stand behind their products. Look at Timberland, Foot Joy, Brookstone, Sharper Image, Costco. All will replace product with very little questions.

    When I buy a $300 item I shouldn’t have to buy an extended warranty. The Podesta post confirms that Apple’s workmanship is shoddy.

  6. Sneiq says:

    Don’t the majority of manufacturers of “gadgets and machinery” offer warranties just below the limit of life-spans? Don’t we all have the feeling that items were built to last forever two decades ago, but that is not the case anymore? Does anybody not know about cost optimization issues in any company throughout the world nowadays? Meeeen, this is the gamefiled we have…