VodkaPundit

Dear Apple: Why a Watch?

ATTAINABLE LUXURY

Smart comment from Hux on yesterday’s Apple Watch preview:

I’ll be honest, I don’t know where Apple is going with this. It’s not really cheap enough to be an impulse buy, like a Pebble or a Fuelband. But at the same time, it’s not really powerful enough to be a standalone product (and yes, I realize it’s more powerful than most smart watches). And I’m shocked, absolutely shocked, that you need the iPhone for it to work properly. Ever since the iPod Apple has gone out of its way to make sure that each product is a distinct device that can be used on its own. No need for a mac if you use iPhone, no any need to for iPhone if you use iPad. Certainly you get more out of them if used in tandem, but it’s not strictly speaking necessary. The Watch goes against all this and is essentially an iPhone accessory that’s even more expensive than the iPhone. So I don’t know what they’re endgame is with this.

Let me see if I can provide a satisfactory answer or two.

First of all, there’s money — always a good endgame for any business. If we assume a 1% uptake rate of 350,000,000 iPhone 5/5C/5S/6/6-Plus owners at an average selling price of $500 and a profit margin of 40%, that gives Apple 3.5 million unit sales in the first year and a profit of $700,000,000. Under a billion hardly seems worth the effort. Factor in R&D and Apple might not do much better than break even.

But both the 1% sell-through rate and the $500 average selling price seem conservative to me. And I suspect Apple’s profit margins will start at 40%, but climb quickly over 50% for the pricier models. The “Edition” line of 18k gold phones could prove lucrative even at modest volumes. It doesn’t take wild assumptions to get up to $3 billion in profit or even higher, just in the first year. And I don’t care how rich a company is, nobody sniffs at nine zeroes.

As for Hux’s complaints about the watch’s seemingly humble abilities, I’ll answer with just two things.

MORE ATTAINABLE LUXURY

The first is that this is the first generation, and already it does far more than any of the competition, in what appear to be really fun ways. Secondly, folks said the same thing about the iPad when it first came out. Hell, even Steve Jobs didn’t seem to know exactly what they’d created when he introduced it — he sat on a sofa on stage and goofed around with it a little. It was developers who made the iPad into what it is today, and the same might prove true of smartwatches.

And it simply isn’t true that before the Watch, every Apple product stood alone. The first three or four versions of iPhone, iPad, and iPod Touch required iTunes (and hence a PC or Mac) to function at all. iPods still require a PC or Mac. The reason iPod blew every other MP3 player out of the water was Apple’s insight that a device small enough to fit in your pocket was a crappy device for managing your music — hence the iTunes/iPod marriage which continues to this day. The same thing goes for Apple Watch. iPod took your iTunes library and extended it to your pocket. Apple Watch is supposed to extend iPhone functionality to your wrist. The market for the latter is yet unknown; the market for the former helped make Apple the consumer technology powerhouse that it is today.

As to why something so expensive should be a mere accessory is simple: You can’t pack enough power and/or battery into a watch to make it work well or long enough to be a standalone product. At least for now.1

But back to money, as it segues us into a larger point.

INTERSECTION

Longtime Sharp VodkaPundit Reader™ Mr Lion reminded us yesterday that the luxury watch market — real jewelry pieces from Swiss houses and the like — is now at around $22 billion a year and growing. That size and growth indicate that there is the potential for a huge aspirational market for sub-luxury watches. Yes, watches seem like yesterday’s technology, killed off by the cell phone. But let’s go back to the watch as an extension of the smartphone. Imagine something to make your life a little easier and more fun, an aspirational-yet-attainable object of beauty and function.

Steve Jobs liked to say that Apple stood at the intersection of Technology and Liberal Arts. That’s a fine place to stand, but that corner might have seen as much development, if I may belabor the analogy, as it’s going to get for a while. You have a desktop, a laptop, a tablet, a smartphone — we’re running out of places to put computers. Which is why everyone has expected “wearables” to be the Next Big Thing for a couple of years now, ever since the smartphone and tablet markets started closing in on their saturation points.

It’s time then for Apple, or for somebody, to set up shop at a new crossroads — the intersection of Technology and Style.

(If you’re at all confused about the difference between style and mere fashion, Virginia Postrel can help you.)

Other companies have been trying (and almost entirely failing) to market wearable computers for months or years now. What might make Apple’s attempt more successful is their ability to uniquely combine several talents:

● Industrial-scale manufacturing of affordable products made of high-end materials

● Aspirational cachet

● Good taste

I can’t stress that last point too strongly. You personally might not care for the look and feel of Apple’s products, but tastemakers around the world do. And that kind of loyalty can’t be bought, as Samsung keeps discovering to its corporate embarrassment.2

What Apple Watch seeks to do then is to create a new market of consumers who would like to wear something nice on their wrist, but need it to do more than just tell the time and date in order to justify an aspirational price. That’s what iPod did to the tiny MP3 player market, exploding it. That’s what iPhone did for smartphones, and what iPad did for tablets. In each case, there was an untapped market of aspirational buyers looking for something practical, fun, well-made, and (mostly) affordable.

Does such an untapped market exist for watches?

We’re about to find out.

1 As a pricy accessory, Apple Watch upgrade cycles will probably more closely follow tablets or personal computers, rather than the iPhone’s two-year upgrade-and-replace cycle. The truly fine 18k pieces might even become heirlooms.

2 I’m assuming for the sake of argument that Samsung is capable of embarrassment.