The wearable market, while young, still generates a great deal of conversation and debate and rightly so. There is a great deal of attention being paid to this category thanks to Apple. While Apple has come on strong in the launch quarter of the Apple Watch, Fitbit continues to make strides forward. There are a few questions to address related to Apple Watch sales and also a theory I have about the market as related to Fitbit.
First on Apple Watch sales. I’ve made some points regarding this in our subscriber forum but I’ve come across some new information that may help get closer to the number of Apple Watch sales last quarter. Without question, Apple sold less watches than many of us thought. We were using what we heard and were guided by the supply chain (which we know is risky). However, without broader retail availability, the supply chain was all we had to go on.
Apple’s revenue from the “other” category came in at $2.7 billion for the quarter. Adding some helpful insight, Tim Cook made the point on the quarterly conference call to tell us to not just use the year over year increase in revenue to this category and draw conclusions of Apple Watch sales. The key point he made was that products like the iPod, Beats, and accessories saw declines year over year. So the revenue contribution of the Apple Watch to the other category was MORE than 100%. So the key question is how much more.
In conversations with several friends at the usual retail tracking outlets and from guidance they gave me, I believe Beats, the iPod, and accessories saw an even higher decline than many initial guesstimates. I had heard 10% declines were about where many had landed but it is easily much higher than that. From what I’ve learned, I believe we can make a strong case Apple Watch revenue contribution was in the range of 1.4-1.7 billion dollars. Which, depending on the ASP (which I also think was lower than many anticipated), can give us a range of 2.9-3.2 million Apple Watches. Based on ASP estimates as well as what we have from primary research, I have a high degree of confidence that Apple Watch sales were in the 3 million range. Still lower than initial estimates of 4.5m but also a bit higher than the low 2-2.5m range most landed on post earnings.
With the broader retail expansion, we are confident Apple Watch sales will accelerate and, thanks to well-placed sources, also a bit easier to track until Apple gives us hard numbers.
Updating my model with Apple Watch adjustments and Fitbit’s announced unit sales, this is the landscape up to Q2 2015.
It is not hard to see an increasing number of Fitbit’s out in the wild, gracing the wrists of consumers. While Fitbit posted strong and record number of units sold this last quarter, the ASP declined as the mix shifted to lower cost trackers, namely the Flex. This is quite interesting. It suggests Fitbit is benefiting from the increased awareness Apple is generating to the category as well as an increase in their own marketing initiatives. However, while Fitbit had been selling mostly to enthusiasts or early adopters, where they can maintain a higher ASP, Fitbit is now starting to gain traction with more first-time buyers. Whether the notorious drawer effect remains, where consumers have high abandonment rate after 6-8 months, remains to be seen.
However, my theory is Fitbit may provide a stepping stone to the Apple Watch. Our research suggests activity trackers like Fitbit have a higher percentage of ownership and purchase intention among iPhone owners globally. Which suggests many with activity trackers, and many intending to buy an entry level one, are already in Apple’s ecosystem. Therefore, Apple has a chance to compete for these customers. Part of the view on this depends on what you believe about more general purpose wearables like a smartwatch, or more specific purpose health and fitness trackers, and the market size for both. My gut is the opportunity is larger for general-purpose wearable devices, due to the diversity in use cases they can address, but we believe there will be a market for dedicated health and fitness wearables as well.
Fitbit is in a tricky spot. If they try to move upstream with the “super watch” category, they risk getting too close to the Apple Watch and likely won’t win against Apple on that front. If all they do is sell low-end entry level fitness trackers, that is not great for the stock either. Short term however, I think Fitbit will have a strong year, possibly even a strong 2016. But I don’t see anything changing from the current duopoly of Fitbit and Apple as the majority of sales in the wearable and smart watch category for the foreseeable future.