Where the Apple Watch goes next

on July 23, 2015

So much has been written already about the Apple Watch over the past few days that I’m reluctant to add to the pile. But having already written a preview piece and a brief analysis of the numbers as released, I actually want to move on to where the Apple Watch goes next because, regardless of what you think about the numbers (or what the numbers actually were), the key thing is where Apple goes from here.

Trajectory is the key question

The question here really is what the trajectory of the Apple Watch will look like going forward. We’ve seen three very different trajectories with Apple’s last three major new product launches, varying by size, speed, and duration of their ramp from zero to their peaks. The iPhone is by far the largest and the iPad was by far the quickest out of the gate but the iPad has gone into a phase of decline far more quickly than the iPod did. The iPhone is still going from strength to strength. What does the equivalent curve look like for the Apple Watch and what can/will Apple do to bring that about? You can see the first 20 quarters for each of those three products in the chart below on a cumulative basis. We’re told that the Watch is running hotter than all three over the first nine weeks. But will it accelerate or slow down after this first quarter?

First 20 quarters

The big questions about the Apple Watch are:

  • when do sales take off?
  • how fast does the trajectory ramp up from there?
  • is there an early ceiling as with the iPad?
  • what’s the ultimate addressable market?

I’ll address each of these briefly below.

WatchOS 2 and the importance of apps

One of the things I’ve been most insistent about from the day the Watch was announced is that third party apps will be critical to its success. However, the initial batch of third party apps has been smallish (8,500) and largely sub-par. That’s partly a factor of developers simply not understanding what makes for a good Apple Watch app (i.e. not just a smaller version of their iPhone app), but it’s also in large part a function of the inability to run apps natively on the Watch. With WatchOS 2, developers will gain that ability and I believe it will be game-changing. Less than a year after Apple introduced the App Store for the iPhone, it was able to run its famous “there’s an app for that” campaign, which I think had a huge impact on how people saw the device. But were Apple to attempt to re-run that campaign now, it’d be hard pressed to find as diverse and compelling a set of apps as it did back in 2009. But WatchOS 2 is much more like iPhone OS 2 than Watch OS 1 was, so that’s the real test: would Apple be able to run a similar campaign in late 2015 to the one it ran in early 2009? I believe that, if it can, it will be the single biggest factor in determining the early trajectory of Apple Watch sales.

Word-of-mouth marketing

The other thing I’ve believed from the beginning is the Apple Watch will benefit hugely from word-of-mouth marketing – that is, from people who have a Watch and love telling their friends, colleagues, and others about it. The challenge is this requires a critical mass of people with Watches to have a significant impact. It also requires them to love it enough to become promoters. I suspect it’s too early for either of these to be meaningful yet but I suspect, as we enter the fourth quarter of 2015 and after the launch of WatchOS 2, both the larger number of Apple Watches in the wild and the third party app explosion will make a meaningful difference. The iPad sold so well right out of the gate because the value proposition was obvious: it was a larger iPhone/iPod Touch. But the Apple Watch is anything but a smaller iPhone – it operates very differently and, as such, is a much harder animal for people to come to grips with. But knowing someone who has one and loves it – and can articulate why – will likely be far more powerful than any ad campaign Apple could run. The most important facet of this form of marketing is it acts as a sort of accelerant of existing trends, such that it could steepen the curve of the trajectory.

New features and Osborne-ing

We’ve come to expect that at least certain of Apple’s hardware products now get annual refreshes, some more significant than others. Will the Apple Watch get a similar bump in hardware next year, and each year after that? And what will the expectation of such an upgrade do to sales as we get closer to next spring? There’s a risk that, without any explicit communication from Apple a second version is coming, it nonetheless creates an Osborne Effect early next year, as people begin to anticipate new Watch hardware. The speed of operating system change could suggest either that Apple intends to improve the Watch mostly through software in its early life, or that it intends to iterate rapidly across both hardware and software, so that’s likely no help. But Apple will want to be very careful to communicate clearly as we approach early next year about what users should expect to avoid depressing sales in anticipation either of a new version or of the price drop in the existing version that usually accompanies a new one. But one of the things we’ve clearly seen with the iPad is people are hanging onto them for a long time because they perform fine even several years after purchase. On the one hand, people certainly expect that to be the case with a Watch. On the other hand, Apple likely wants to be careful not to create another product where it is constantly trying to find new people to sell them to because all the people who already have one aren’t upgrading. So there’s a balance here.

Long term: independence from the phone

I’m doubtful Apple Watch 2 will be the version that becomes independent of the phone, with its own LTE connectivity, but it’s inevitable we’ll eventually get to that point. Obviously, that doesn’t immediately mean it replaces your phone, but it does raise an interesting question of how the balance between the two devices shifts when this happens. Does the Watch become the primary device at some point on this timeline and what does that mean? Do we start to think of the phone as the device we turn to when the Watch can’t help us, as a sort of device of last resort? Or does the Watch’s increased capability start to erode the differentiation associated with the phone, pushing us to use larger-screen devices like the iPad and Mac more? Does the Watch start to make sense as a companion for phones other than the iPhone at this point? If it is no longer reliant on a phone (just as the iPhone is no longer reliant on iTunes), does that open up the addressable market further? These are long-term questions, but they go to the ceiling of that trajectory we talked about up front.

A decent start

The challenge at this point is that, even though we have some insight now into the first few weeks of sales for the Apple Watch, it’s still entirely unclear what the shape of that trajectory will be. I’ve outlined some factors I think will impact trajectory but so much depends on execution by Apple over the coming months and years. We’ve certainly seen a decent start, even if slower than I and some others were expecting. But, to my mind, the real test is the fourth calendar quarter of 2015, when the Watch ought to see strong sales off the back of Watch OS 2 and the gift-giving season in Western markets. Come January next year, we should have a much clearer sense of that trajectory.