Series 4 Watch Could Grow Apple’s TAM and its ASP
Apple’s launch of the Series 4 Watch this week will likely have a very positive impact on the company’s total available market (TAM) for wearables as well as its average selling price (ASP). The watch’s new, bigger display and faster custom silicon should help drive a refresh among current Apple Watch owners. More importantly, the addition of new health-focused features—including two FDA-cleared apps—should drive a dramatic increase in interest from patients, doctors, insurers, and many others. And Apple took the opportunity with this strong hardware update to also announce an increase to the starting price of the new watch to $399, while keeping the Series 3 in the market at a new lower price ($279) that’s still a $30 premium over the value-focused Series 1 it was shipping prior to the announcement.
In other words, Apple is now likely to sell more watches to more people–at a higher average selling price–than in the recent past. That’s quite a move, especially when you consider that it wasn’t long ago that many skeptics were still calling the Apple Watch a flop.
Bigger Display, Faster Chip
The Series 4 represents the first time the company has made a big change to the size of the Apple Watch display, increasing its two sizes from 38 and 42 mm to 40 and 44 mm. In addition to the larger size, Apple has narrowed the bezels, resulting in a roughly 30% increase in viewable area, which is very noticeable on the wrist. Apple leverages this new display with reworked watch faces, including many with notably more complications, which drives up the information density on the display dramatically.
To my eye, Apple does this so well the display doesn’t look overcrowded or cluttered. And one of the advantages to having all these complications on the screen is that the wearer has easier access to the underlying apps, which has always been one of the biggest interface challenges for wearables.
In addition to the larger screen, Apple also made the Series 4 ever-so-slightly thinner, added new haptic feedback to the crown, and maintained backward compatibility with existing watchbands. As with previous years, some of the biggest changes happened inside the device. Apple says the new S4 chip is twice as fast as the previous generation chip while maintaining a comparable level of battery life performance. The first generation Apple Watch was painfully slow, but each iteration as seen dramatic performance gains, and with the Series 3 I’ve found performance to be more than adequate for the vast majority of tasks. It will be interesting to see how Apple—and potentially third-party developers—will leverage the improved performance of the Series 4 going forward.
The new display and faster internals are great for current Apple watch owners who like their current device and who are looking for a reason to upgrade. But the addition of some very specific health-related features is what may well drive a sizeable increase in Apple’s total available market. First, the company improved the gyroscope and the accelerometer so the watch can detect if the wearer has suffered a fall. Next, Apple added new heart-rate technologies that can detect a low heart rate and screen for Atrial Fibrillation (AFib). Also, the company added sensors in the back of the watch and in the crown that lets the wearer run an electrocardiograph (ECG).
In addition, the Watch will store the results of these tests in the Health app for sharing with your doctor via PDF. It’s very notable that the FDA cleared the ECG and AFib apps (the FDA “clears” Type II devices such as the Apple Watch, while it “approves” higher-risk Type III devices such as pacemakers.) This FDA clearance could make the Apple Watch much more attractive to a wider range of potential buyers and could drive meaningful volumes as doctors, insurance companies, and caregivers think about buying these devices for people who would never buy it for themselves. Apple says the ECG app will appear later this year, after the product launch later this month.
Driving iPhone Stickiness
Even before the Series 4 announcements, I’d been thinking about the positive benefits Apple Watch has been driving for the company. Obviously, there are the revenues of the product itself, which Apple claims is now the number one selling watch in the world, surpassing all other wearable vendors AND traditional watch vendors. Perhaps just as important, however, is the stickiness that the Watch drives for iPhone. I know many Apple Watch users that are arguably more attached to their Apple Watch than to their iPhone. The symbiotic relationship between the phone and watch means few of these users will leave the iPhone, even if they wanted to. And then consider the potential new Apple Watch customers who might currently be using an Android phone or even a feature phone. To fully utilize the watch, they too will need to buy an iPhone. That’s a position most smartphone vendors would love to find themselves in.
And all of this is before we consider the real possibility that the Series 4’s higher price –alongside the retention of the Series 3 at a higher entry-level price–will drive a higher average selling price for Apple Watch in the all-important fourth quarter of the calendar year. So in the space of just over three years Apple launched the product, later lowered prices to drive adoption, and now feels its market position and new hardware are strong enough to warrant a higher starting price. It’s unlikely Apple will change its policy of not reporting Apple Watch shipments and ASPs in its earnings calls. But if this new hardware does what I expect it to do, Tim Cook and his team may decide they do, in fact, want to share a few more specifics around Apple Watch’s market performance over the holidays.