Why Making A $6,000 Smartphone May Not Be Crazy After All

It’s easy to make fun of Vertu.

In case you’re not familiar, Vertu is a maker of luxury mobile phones. And by “luxury” I mean models that cost anywhere from roughly $6,000 all the way up to $12,000 (and well past that, for special orders that can go into the mid-six figures). What drives those looney-tunes prices? Materials and craftsmanship, mainly. Sapphire crystal faces instead of Gorilla Glass. Titanium bodies (or gold, or platinum) instead of plastic or aluminum.

Here’s the case against the company: They’re just making bejeweled versions of ordinary smartphones. Their products are gaudy, silly things that offer no functional advantage over an iPhone, a Galaxy S4, or many other smartphones on the market. They are designed for, and purchased by, status-obsessed arrivistes who have more money than sense.

It sounds like a recipe for failure, except for one thing: Vertu’s sales figures keep going up. “Either there are a lot of crazy people in the world or, I would suggest, there are a lot of different people in the world,” says Vertu’s chief executive officer, the fabulously named Massimiliano Pogliani. “There are people who appreciate certain things, and there are people who do not. And if you do appreciate this sort of thing, and you can afford it, then it’s your choice how you spend your money.”

Vertu won’t release specific numbers, but it does confirm that its sales have grown in nine out of the past 10 years. (The one year that disappointed the company was 2008, which was a year that disappointed a lot of people for a lot of reasons.) The company’s expecting a further uptick in sales now that it has a second, less-expensive (relatively speaking) smartphone in its lineup. The new phone, the Constellation, retails for $5,950 in the U.S. and joins its more-expensive brother, the Ti, which costs about $12,000.

Having two smartphones is a big deal for the British-based company, which used to be a part of Nokia (NOK) but was spun off and picked up by Swedish private equity firm EQT VI in 2012. Until the Ti was introduced earlier this year, Vertu had no smartphone at all. You could spend as much for a platinum Vertu Signature phone as many people would on a house, but all you were getting was a feature phone that was little different in function than what you could buy from Motorola in 1999.

Vertu changed that by adopting Android as the base operating system of the Ti and Constellation. Both phones have special features such as apps that alert you to exclusive events and a dedicated concierge line, but it’s unlikely anyone who’s buying a Vertu is buying it for that. After all, if you can afford one, don’t you already have entree into various privileged places on your own?

What they’re buying is a smartphone that doesn’t look like all the others. They’re buying it because it’s exclusive, special, and rare. As I wrote in an earlier post on this subject, you don’t need anything fancier than a Timex Easy Reader if you want something on your wrist to tell time. Indeed, you don’t need anything more than a Kia (000270:KS) Rondo if you want a car to take you from point A to point B. And yet Patek Philippe exists. And so does Rolls-Royce (BMW:GR). Obviously there’s always a segment of the population willing to pay more for something not necessarily because it performs a task better than the least-expensive option, but because it does so with added luxury. Sometimes they pay more simply because they canâ€"a classic Veblen good, for which demand increases along with price.

And in the world of smartphones, that may make more sense than ever. Think about it: In the past, Vertus were stupid because they were just dumb feature phones made out of precious metals. An iPhone or Android phone was functionally better in so many ways that you couldn’t justify buying an inferior product, no matter how many diamonds and rubies it had on it. But now, with models like the Ti and the Constellation, you don’t have to make that sacrifice. You get all the benefits of an Android phone (Vertu is using the latest version of Android: 4.2) plus the luxurious touches that set you apart from the rest of the crowd.

Now, there’s a simple response to this that says: “Anyone who spends thousands of dollars on a smartphone is an idiot.” Maybe that’s true, but that doesn’t acknowledge centuries of human purchasing behavior, particularly among the wealthy. “Price is not the driving point,” says Pogliani. “If you don’t like wine, spending $5,000 on a bottle of Mouton Rothschild doesn’t make sense to you.” And in his view, a phone is a far better value than a bottle of wine. “These phones will last two to three years, whereas a bottle of wine may last, what, an hour or two? But if you care about this sort of thing, that hour or two is priceless to you. For a person who drinks orange juice and smoothies and Diet Coke, this does not speak to you.”

So there’s a logic here. After all, there are about 1.2 million people in the world who have investible assets greater than $5 million. If Vertu can capture a tiny sliver of that, well, that’s a business. And the company may decide at some point to go after the almost 11 million people who have between $1 million and $5 million. The cheapest Vertu currently costs $6,000, but would Vertu sell a phone for less than that? Pogliani’s not saying, but he’s not closing the door on it, either. “If we see an opportunity to cover another tier that is lower than this one, then we will explore that,” he says.

He may encounter some competition if he chooses to make that move. Right now, a top-of-the-line iPhone sells without subsidies for almost $1,000. Vertu may find a sweet spot in the $3,000 range, but then Apple (AAPL) could decide it wants to play up there too. CEO Tim Cook has made it clear that Apple is a premium manufacturer and isn’t going to chase the rest of the smartphone industry as it races toward lower and lower prices. While Apple’s not likely to go all the way up to Vertu prices (Steve Jobs famously compared his company to Mercedes-Benz (DAI:GR) and BMW (BMW:GR), not so much Rolls-Royce. Although, BMW did wind up buying Rolls. …), the company has hired the former CEO of Burberry, as well as the CEO of Yves Saint Laurent.

It would appear that Apple realizes something that Vertu has been working at for a while: There’s a portion of tech that is increasingly about fashion and luxury. If the fundamentals of a product are established (if a smartphone is a smartphone the way a watch is a watch), how do you distinguish yourself? Materials? Craftsmanship? Design? These are terms we use to talk about certain handbags and watches, but soon we may be adding smartphones to that group.