I’ve been thinking a lot recently about the various hardware product categories in the consumer technology market, how each of them is faring, and the common trends and differences between them. It’s occurred to me that – if viewed from a certain angle – adoption cycles for major product categories seem to be shortening. I want to use Apple’s last four major products to illustrate this but also to pull out some broader trends about what’s happening in the hardware industry.
From the iPod to the Apple Watch
Let’s start with the data on Apple’s last four major product launches. What I’ve done here is take trailing 4-quarter sales for each product from the quarter it was launched as far as we have data and then superimpose those four data sets on each other so we can compare them. The scale is obviously not consistent between charts and that’s important, but it’s the pattern we’re looking at here, not the absolute size:
As you can see, the shape of the curves is different in every case. I also want you to note how similar the iPod and iPhone curves are and how different the iPad and Apple Watch curves are relative to each other and to those two earlier products. Both the iPod and iPhone went roughly 8-9 years from launch to the first real sign of a peak. Conversely, the iPad went just three years before it peaked and shipments began to fall. The Apple Watch made it only one year before annual shipments began to fall. In other words, the shape of the curve was much steeper for the iPad than it was for the iPhone or iPod and the Apple Watch curve has been steeper still. (I’ll come to some caveats in a minute, but bear with me for now.)
Why would this be? What changed between those first two products and the last two? It might be partly a question of scale – the iPhone has found a much larger addressable market than the iPad and, as such, it took longer to reach a peak. Maybe, but the iPad found a larger addressable market than the iPod, peaking at around 75 million shipments a year versus the iPod’s peak of around 55 million, so that can’t be the whole answer. I’d argue that what really changed were the fact those first two products existed when the second two launched. First the iPod and then the iPhone ensured hundreds of millions of people were intimately familiar with Apple’s products for the first time and had certain mostly positive associations with those products that made them more disposed to buy additional Apple products when they came along.
With the iPod, Apple essentially had to familiarize potential customers with the concept but also to convince them to buy a product from Apple, a company which wasn’t known to most of them. Selling the iPhone was a bit easier, since many were now more familiar with Apple products through the iPod but most iPhone sales still went to people who hadn’t used Apple products before. The iPad, by contrast, was a very simple concept to sell to someone familiar with the iPhone – it worked in many of the same ways but was larger. The fundamental concepts and value proposition were very known and many millions already had a similar device in their homes. Last, the Apple Watch is only sold to those who already have iPhones and very much takes advantage of that installed base too.
So all that explains the faster rise from zero, but not necessarily why things have (or appear to have) turned south so much sooner. What this comes down to is these newer products are targeting fundamentally smaller addressable markets than the iPhone (and in the case of the Apple Watch, the iPod too, at least for today). iPad shipments peaked at around a third of peak iPhone shipments because far fewer people have the need for such a device. And Apple Watch shipments are (for now) much lower even than iPod shipments were at their peak because it, too, has a much narrower value proposition. Many people were in the market for a portable music player and almost everyone is in the market for a smartphone – not so the tablet computer, let alone the smartwatch. So these later products have not only ramped up sales more quickly than their predecessors, thanks to the iPhone installed base, but they’ve also peaked at much lower levels.
All this is important as context for any future Apple product launches – it’s very likely those future products too will ramp faster and peak sooner in absolute terms than the iPhone or iPod did. That means it’s less likely Apple will find future hardware products which drive sustaining growth over a longer period of time – rather, we’re likely to see more of these rapid-adoption products that drive big growth over a short time period followed by stagnation or decline. That’s going to make Apple’s future revenue growth even more unpredictable on a short-term basis.
The state of the Apple Watch
Now, I said I had some caveats. It’s arguably grossly unfair to suggest the Apple Watch has peaked at this point – it’s only been on sale for around 18 months and, though annual sales have indeed begun to fall, that may be as much an artifact of release timing as anything else. Taken together with the abandonment of Android Wear by major partners, the failure this week of Pebble, the ongoing struggles of Jawbone, and questions over Fitbit’s long-term future, it’s easy to see a pattern and proclaim the death of smartwatches as a category, as I’ve seen a few people do this week but this is all premature. Tim Cook has said holiday sales so far are ahead of last year and one would certainly expect strong sales off the back of both more compelling products and much lower entry level price points. IDC’s much-shared numbers this week suffer from two problems. First, they’re comparing the first full quarter of sales for a new product in 2015 with the last quarter of sales before an anticipated new release in 2016. Second, their numbers seem way too low. By my estimates, Apple probably did sell about 50% fewer Watches in Q3 this year than last year, but the number was likely over 2 million rather than close to 1 million.
As I’ve written previously, while it’s tempting to say the Apple Watch has peaked along with the smartwatch market as a whole, I actually think we’re going through a temporary period in which the Apple Watch’s focus is narrowing before a potential broadening of appeal and addressable market. The rest of the smartwatch market definitely looks to be in dire straits at the moment but there’s potential for the whole market to recover at some point in the future when use cases beyond fitness tracking and notifications become stronger. For now, it’s mostly an Apple Watch market with a few other smaller players rather than a true smartwatch market, but Apple will continue to sell over 10 million Watches a year for the foreseeable future, with potential for far higher sales going forward.