A funny thing happened to Apple along the way to the 21st century. Despite millions of loyal fans, the company almost folded.

Despite the iMac, the PowerBook, and a lean and mean product lineup, Apple’s marketshare dropped at the turn of the century, and so did revenue. From then on a series of unpredictable events occurred which launched Apple into the corporate stratosphere.

Of Stores And iPods

In the early part of the century Apple gambled big. It launched retail stores at a time when PC manufacturers were shuttering their stores and gadget stores were struggling to remain relevant.

Remember Circuit City and CompUSA? Apple’s retail stores did something that ignited the so-called halo effect on the Mac, and eventually the company’s new products.

The marriage of Apple’s popular iPod and retail stores created a halo effect which improved sales for everything. Why? Once iPods began to sell in numbers to everyone, Windows users included, Apple benefited by more store traffic.

Customers loved the iPod experience so much that they began to trust anything with an Apple logo on it. Mac sales started to increase with marketshare. Customers could see, touch, feel, and try out Apple’s products in a friendly, non-threatening retail environment.

Apple benefits from that halo effect.

The halo effect is a cognitive bias in which an observer’s overall impression of a person, company, brand, or product influences the observer’s feelings and thoughts about that entity’s character or properties. It was named by psychologist Edward Thorndike in reference to a person being perceived as having a halo. Subsequent researchers have studied it in relation to attractiveness and its bearing on the judicial and educational systems. The halo effect is a specific type of confirmation bias, wherein positive feelings in one area cause ambiguous or neutral traits to be viewed positively.

At the peak of the iPod’s growth Apple had a few hundred million new customers and most of them loved their iPods, then the Mac, and the total Apple experience. Apple was well positioned to extend the halo effect to hundreds of millions of additional customers when the iPhone came along and changed the smartphone industry.

Apple was trusted, thanks in large part to friendly retail stores, Macs vs. Windows, and how well the iPod worked compared to competitors. That trust created an atmosphere so inviting and attractive that customers would buy iPhones and Macs and iPads with little consideration. Why? The overall shopping and ownership experience was vastly superior to competitors.

There’s a reason Apple works so diligently to create an ecosystem where the sum of ownership is greater than the individual parts. There’s a reverse or dark side to the halo effect, often called the horns effect.

The halo effect works both in both positive and negative directions (the horns effect): If the observer likes one aspect of something, they will have a positive predisposition toward everything about it. If the observer dislikes one aspect of something, they will have a negative predisposition toward everything about it.

In other words, if the buying and ownership experience is dreadful, Apple benefits. Yet, Apple’s product margins are such that it can afford to treat customers differently throughout the buying and ownership experience to a degree that Android smartphone and tablet makers, as well as Microsoft and Windows PC makers cannot.

As long as the overall experience of owning an Apple product is more pleasant, comfortable, and less worrisome than competitors, the halo effect stays in effect and extends to additional products and services. Enter Apple Watch.

Will watch benefit from the halo effect? Absolutely and, to a great extent, already has. Watch won’t sell in the same numbers as iPhone, but if it sells somewhere between Mac sales units and iPad sales units, it can be called a huge success. Even at Mac-to-iPad sales numbers Watch could easily be worth $10-billion to $40-billion in additional annual revenue (I’m figuring an average selling price of $500 times 5-million to 20-million units per quarter).

Apple’s halo effect may be the most important component in Apple Inc.