Paul Graham: When your product loses its functional advantage, what is left? | Sequoia Insider

Ask AI · How Can Patek Philippe Use Brand Design to Respond When Its Functional Advantage Disappears?

Key Takeaways

· This article is compiled from Paul Graham’s latest piece. With a history of Swiss watchmaking, he lays out a question crucial to every entrepreneur: when your product loses its functional advantage, what do you still have left? The answer is thought-provoking.

· Technological progress will naturally level out functional differences between products—this is not something specific to a single industry, but a reality almost every industry will face sooner or later. When functional advantages disappear, brand becomes the final moat. Understanding this pattern in advance is the prerequisite for making the right strategic choices.

· The participants of the golden age didn’t know they were living in a golden age. They were simply chasing interesting questions. This is Paul Graham’s most important advice to entrepreneurs: instead of looking for the next hot trend, follow questions that are truly valuable—good questions are a more reliable compass than any trend forecast.

In the early 1970s, the Swiss watch industry went through a major upheaval. Today people call it the “quartz crisis,” but in reality, it was the compounded result of three risks breaking out almost at the same time.

The first was competition from Japan. Throughout the entire 1960s, the Swiss kept watching their Japanese counterparts in the rearview mirror, seeing how they were rapidly catching up. Even so, when in 1968 Japanese makers swept all top positions in the mechanical watch evaluations at the Geneva Observatory, the Swiss were still shocked.

The second was the change in exchange rates. Since 1945, the Bretton Woods system had kept the Swiss franc pegged at 0.228 USD, but it collapsed in 1973. The franc then appreciated significantly, reaching 0.625 USD by 1978—meaning Americans’ cost of buying Swiss watches jumped by 2.7 times.

The third was the introduction of quartz movements. Even without it, external competition and the shock from exchange rates would already have been enough to deal a devastating blow to the industry. But the appearance of quartz movements was the final straw that broke the camel’s back—it made “precise timekeeping,” which had once been an expensive thing, turn into a cheap commodity overnight.

From the early 1970s to the early 1980s, Swiss watch sales fell by nearly two-thirds. Most brands went bankrupt or were acquired. But not all brands fell. A few survivors found a way forward—they transformed themselves, from precision instrument manufacturers, into luxury brands, completely.

The End of the Golden Age

Before that, it’s necessary to review a period known as the “golden age”—roughly the 25 years from 1945 to 1970, when Swiss watchmaking stood at the peak.

Watchmakers in that era focused on two things: thinness, and accuracy. These were the core trade-offs of the craft: a watch is either easier to carry or more precise at keeping time. After wristwatches became widespread, “thinness” even took priority over “accuracy,” because it was harder to achieve and did a better job of distinguishing levels.

The top three brands—Patek Philippe, Vacheron Constantin, and Audemars Piguet—won an undisputed reputation through exceptional craftsmanship. They walked on two legs: prestige and performance. And in the following two decades, they had to shift all their focus to prestige, because they could no longer win on performance—quartz movements were not only more accurate than any mechanical movement, but also thinner.

Omega’s case is a cautionary tale. Omega was the “tech nerd” of the Swiss watch world; their attitude toward building a luxury brand was ambiguous. After Japanese makers caught up with Swiss brands on precision, Omega’s response was: then we’ll make an even more precise movement. In 1968, they introduced a new movement with a running frequency 45% higher—supposedly more precise, but in practice, its excessive fragility severely damaged the brand’s reliability and reputation. They even tried to develop better quartz movements, but found it was just a dead end with a narrowing path. In 1981, Omega declared bankruptcy and was taken over by its creditors.

From Craft to Brand: A Thoughtful Transformation

Patek Philippe took an entirely opposite path. While Omega was redesigning its movements, Patek Philippe was redesigning its watch cases—more precisely, it was the first time it began designing its own watch cases.

In 1968, Patek Philippe launched a new watch called “Golden Ellipse.” For the first time, it brought its design directly to the manufacturer and said, “Make it exactly like this.” It was a rounded rectangular case, quite avant-garde for the time. It also marked the birth of a brand-new strategy: to make the watch itself the carrier of the brand.

The most embarrassing question about the most expensive watches in the golden age was this: unless you leaned in and looked closely, nobody knew which brand you were wearing. The endgame of minimalism often has only one answer—every top brand’s watches look pretty much the same. The brand name on the dial was as small as 0.5 millimeters in height, and the brand’s “visual area” was only 8 square millimeters. But once Patek Philippe took over the design of the case, that area suddenly expanded to 800 square millimeters.

Why did they suddenly decide to make the brand “speak loudly”? Because they knew they couldn’t win on performance anymore.

To support the new strategy, Patek Philippe began doing something it had never really taken seriously before: brand advertising. And the theme of the ads wasn’t precision, wasn’t craftsmanship—it was—price. A 1968 ad explained why you should put half a month’s income into a Golden Ellipse, because they emphasized that “only 43 Patek Philippe watches are issued from the factory each day.”

Brand as Centrifugal Force, Design as Centripetal Force

In 1972, Audemars Piguet went one step further. They commissioned the well-known designer Gérald Genta to design a bold wristwatch made with steel—Royal Oak. The tagline was: “For the price of gold, unveiled in stainless steel.” The dial and the metal bracelet were seamlessly integrated, so that brand information seeped into every square millimeter of the watch’s surface.

Patek Philippe, however, found Genta again in 1974 to design the Nautilus, inspired by the portholes of ship cabins, and released it in 1976. This watch had a diameter of 42 millimeters—whereas the most expensive men’s watches of the golden age usually measured only 32 to 33 millimeters. On both sides, there were also decorative protrusions like ears. You could recognize it from the other end of the room.

Here you can see the contradiction between brand and design.

A brand must have recognizability. But good design often pursues the same correct answer. Brand is centrifugal; design is centripetal.

So the two are more like opposing forces. In many cases, you can’t choose a “good solution,” because everyone else will also choose the same solution. You can only choose a “distinctive” one—and that almost inevitably means some compromise. The crown of the Golden Ellipse was deliberately made smaller to highlight the case silhouette, which resulted in it being extremely difficult to wind. The Nautilus grew beyond the aesthetic boundaries of that era. None of these are design mistakes—they are the inevitable cost of brand logic.

Of course, brand and great design aren’t always opposites. There are two situations where they can coexist: first, when the design space is large enough—if there are potentially infinite possible solutions, then designers might be able to achieve near-perfection while staying unique, like a painting by Leonardo da Vinci: it can be both the ultimate correct answer and an unmistakable personal style that can’t be replicated; second, when the design space hasn’t been fully explored yet—the first mover can find the correct answers and claim them for themselves, but as more competitors enter, the space gradually contracts and the brand advantage slowly evaporates. The watch design space is neither large enough nor has it not been explored for long—so when the functional advantage disappears, the shift into the brand era is almost inevitable, and that shift inevitably comes at the cost of good design.

The Arrival of the Brand Era

Audemars Piguet’s official website once described one of its series like this: “Inspired by classic designs from the golden age of watchmaking.” This sentence is full of meaning—it almost directly admits: what we’re in now is not the golden age.

So where are we now? If we were to name each era, the thread is clear: if 1945 to 1970 was their golden age, then from 1985 to today is the brand era.

This is not a history unique to the watch industry. In pure art, the brand era had already arrived by the 1930s: the value of a work increasingly depends on which gallery it hangs in and who vouches for it, rather than what the work itself depicts. The watch industry has merely replayed this process in the clearest, most complete way.

The real turning point came in the 1980s. What made Patek Philippe’s sales curve turn upward from then on was a watch called “3919,” because it was highly sought after in the New York investment-banking circles of the 1980s and 1990s. The 3919 was manually wound, with accuracy of about 5 seconds lost per day. Its customer base—the investment bankers known as “yuppies”—believed deeply in the intrinsic value of mechanical watches and didn’t care at all about the existence of quartz movements. After 1987, Patek Philippe’s sales curve began rising and has never stopped to this day.

There’s an important insight about the relationship between brand and quality that’s worth stating clearly on its own. People may ask: if a watch is sold based on brand rather than performance, does quality still matter?

It matters, but its role changes.

Quality is no longer “a competitive edge driving sales,” but “a baseline threshold for maintaining brand credibility.” The 3919 loses 5 seconds per day—far worse than any cheap quartz watch, yet it’s still enough. If the error were 5 minutes per day, it would make the whole thing seem too ridiculous. But 5 seconds just barely crosses that line. The brand sells the product; quality protects the brand from becoming disfigured.

Lessons Worth Thinking About

The most striking thing about the brand era is its absurdity. The miniaturization achievements earned through 500 years of progress were reversed in one stroke into ever larger, ever more strangely shaped watch cases.

The root of this absurdity is: without functionality, form loses what it can follow.

In history, almost every golden age had a forgotten fact: the participants at the time didn’t know they were living in a golden age.

The greatest watchmakers in the watchmaking golden age weren’t making watches because they wanted to create a golden age. They simply believed there was a batch of interesting problems worth solving—making the movement thinner, making timekeeping more accurate—and then they went and solved them. The label “golden age” was applied by others in hindsight.

This isn’t to say the golden age is fictional. Quite the opposite: precisely because those people put their attention on the problems themselves instead of on “I want to be in a golden age,” they ended up creating genuinely excellent things. If someone spends all day thinking about “how to get themselves into a golden age,” they might end up overfitting the golden age’s surface characteristics and miss the real engine that drives the era forward.

So the true methodology is: follow interesting questions, not go searching for the golden age. If you’re smart, ambitious, and honest with yourself, then your taste in problems is the best compass. Go to where the interesting problems are, and you’ll probably find that other smart and ambitious people are gathered there too. Later, people will look back on the things you all accomplished together and call it the golden age.

Addendum:

In the original text, Paul Graham includes 16 notes, and three of them are worth venture-capital readers thinking about:

1. The real return on investment of buying watches. He calculated the actual gains from buying a Patek Philippe 3548 at market price in 1970 as an investment: the equivalent annualized return is about 4.5%. Meanwhile, in the same period, the S&P 500 was about 10%, and gold about 9%. The so-called “buy-a-watch and preserve its value” isn’t a very good investment choice in the data.

2. If you truly love watches, he suggests buying used watches from the golden age (1945–1970), rather than new ones. They’re often more beautiful and cheaper, and their timekeeping is just as accurate. How to choose a dealer: see whether they proactively disclose the movement model, whether they provide photos of the watch with the case opened, and whether they honestly reveal information about wear and tear. Transparency is the best indicator of a dealer’s trustworthiness.

3. He analyzed Patek Philippe’s potential risk points: younger generations begin to view mechanical wristwatches as “for older people,” the same way today’s young people feel about tuxedos. The fragility of the brand era is rooted in its core support: one particular psychological trigger in human minds. Once the audience for that button changes generations, the whole building may start to wobble.