Apple’s Wearables Juggernaut

Apple had a very good holiday quarter, lead by strong sales of the iPhone and continued growth in its services business. But one of the key takeaways from this week’s earnings call was the expansion of its wearables business, which set new company records with 44% growth in the quarter. I’ve been saying for years that wearables have an important role to play in the future of tech, and Apple clearly sees it the same way. The market lead Apple is building, and the knowledge it’s accruing by designing and shipping these highly miniaturized products in volume, will help the company drive a wide range of new products and experiences in the future.

Expanding the Category
Two drivers of Apple’s success in the quarter included strong sales of its lowest price watch and its priciest set of Air Pods. When Apple launched the Series 5 Apple Watch in September, it also announced it would keep the Series 3 product in the market at a new lower price starting at $199. That watch was so popular during the holiday quarter Apple couldn’t keep up with demand. Similarly, Apple’s new Air Pods Pro, which sell for $249—a notable jump over the $159 of its existing Air Pods—were very difficult to attain. So in the space of a single quarter, Apple expanded its market downward by addressing customers who had $200 to spend on a smartwatch, and upward to those who were willing to spend up to $250 on a more advanced set of earbuds.

One of the more interesting stats that Apple executives noted during the call was that 75% of Apple Watch buyers were new to the product. In other words, there continues to be a long runway of growth in front of this category for Apple. And the company knows that once it has acquired a customer in a category, it is very likely to keep that customer going forward. Moreover, in the case of wearables, that customer is very likely to a) own an iPhone (with a strong likelihood of continuing to buy iPhones) and b) likely to subscribe to one or more of Apple Services, with a likelihood to continue to utilize that subscription over time. It’s a virtuous circle that nobody in the industry is currently replicating, and it will drive unit and revenue growth for Apple for years to come.

Scant Big-League Competition
While Apple has methodically built out its wearables business, other tech giants have struggled to field truly competitive products. From a volume perspective, the top five wearables vendors in 3Q19, according to IDC’s Wearables Tracker, were Apple, Xiaomi, Samsung, Huawei, and Fitbit. During that quarter, Apple-owned 35% of the unit shipment market share and nearly 60% of the revenue.

While major smartphone vendors such as Samsung and Huawei are playing in the wearables space, I’d argue they are not actively building out the same type of ecosystem that Apple has achieved. Some blame Google for this, as its work in the wearable space has been uneven at best, terrible at worst. (Samsung primarily utilizes its own Tizen OS.) However, Google seems to be refocusing its attention on wearables. It announced in November 2019 that it would acquire industry pioneer FitBit for $2.1B. It will be interesting to watch what Google does with Fitbit’s technology and how it leverages it to improve WearOS. I also expect to see Qualcomm bring new wearable-focused silicon to the table during the year.

While no vendors have achieved Apple’s level of success in wearables, there have been plenty of players achieving more modest success, and some of them have pretty grand plans (check out Amazfit’s CES announcements). As a result, the broader wearables market saw strong growth throughout 2019. Back in December, IDC predicted that the entire wearables market would reach shipment volumes of 305M units for the year, up 71% from the prior year. We expected the smartwatch category to hit 70 million units for the full year, and we put smart earwear at about 139 million units for the year. (The rest of the market is fitness bands and smart clothing.) The market should top 500M units by 2023, so there is obviously growth happening in this category outside of Apple. The question remains, will other vendors utilize that growth to drive broader innovation or just unit shipments?

Apple: Looking Ahead
Apple’s focus on Wearables has driven sizeable revenue growth for the company in the near term, and it has enabled a wide range of use cases that have helped enrich people’s lives today. But I expect its wearable products to drive an even wider range of experiences in the future. I’ve said for years that I expect one of those experiences to be around augmented reality.

Apple continues to build out AR capabilities in the iPhone, and I expect that device’s hardware to take another leap forward in terms of capabilities this year. Concurrently, the company is enabling developers to create AR experiences with a wide range of tools. All this work is leading toward the eventuality of a pair of Apple AR glasses, and I fully expect that one of the ways we’ll interact with the information presented on those glasses is through our Apple Watch and Air Pods. I expect those interactions to be a combination of gestures, head tracking, and voice.

And that leads me to discuss the one real weakness I see in Apple’s wearables portfolio: Siri. Carolina Milanesi tweeted during the earning call, “I was thinking about Apple wearables numbers and the success of AirPods and AirPodsPro and what a missed opportunity this growth has been for Siri. If only it had delivered a better experience, think about the popularity it would have reached through AirPods.”

I couldn’t agree more. Moreover, I would argue that down the road, if Apple doesn’t figure out a way to dramatically improve Siri’s usefulness, it could become a drag on the company’s ability to move both the wearables category and the upcoming AR segment forward over time. I hope over the course of the next few years, we’ll not only see Apple roll out interesting new wearables hardware, but we’ll see it lean into making Siri the first-class interface necessary to drive a new range of user experiences.