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?
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.
I think the biggest hurdle for Apple Watch right now is the perception of the value it brings vs. the cost. As you stated, the value in the iPad was obvious: it gave us a much larger screen to do all of the things we loved to do on our iPhones and iPod Touches. The Watch, however, is a different animal. To start off, take a look at the price: $350-400 just to get the Sport version is enough to make anyone think twice, especially when the Watch’s utility isn’t anywhere near as obvious as the iPad. A price point like that for what is, at least at this time, an iPhone accessory is enough to make most people think twice about purchasing. If, however, Apple reduced that price by $150–making the entry point the same as the subsidized price of the base model iPhone 6, that psychologically might have an effect and make more people willing to take the plunge.
That said, in terms of upgrading, you’re probably going to see over time the same thing we’ve observed with the iPad: that people are far less willing to get the latest model so long as the one they have is still working well–especially if the price of the Watch doesn’t come down significantly. Unlike iPhones, which you can resell for more than the subsidized price of an upgrade, the Watch will not enjoy the kind of aftermarket that makes upgrading attractive (another thing it has in common with the iPad).
Long story short, Apple needs to make the entry-level Watch a lot less expensive if it expects to churn, churn, churn.
“Long story short, Apple needs to make the entry-level Watch a lot less expensive if it expects to churn, churn, churn.”
What makes you think Apple expects to “churn, churn, churn” (at least more than they are already. They still can’t make enough fast enough. How does more demand help that)?
Joe
It’s the phenomenal success of the iPhone driving that mentality (at least among Wall Street types). See the way iPad sales are lamented as if they’re in a “slump”. In reality, the iPad remains very popular–it’s just that absent subsidies to make it less expensive to the consumer, people are a lot more inclined to hold on to it for much, much longer, rather than upgrade every couple of years like iPhone users do.
The Watch faces a similar challenge. Even if it enjoys great success out of the gate, people aren’t going to be upgrading it every couple of years because the price point (and resale value) makes it difficult for the average consumer. Granted, the higher-end users might not care so much, but the volume sales will always be with the Sport–and I still think that price point needs to come down significantly if sales of the Watch are going to continue at a good clip. The Sport only costs around $85 to manufacture, so there is a lot of wiggle room there.
(at least among Wall Street types)
Well, that’s the gist of it though. Those types are never happy and always think they are experts in what they are investing in or the companies they follow. Apple has never given anyone any reason to think they are ever interested in “churn”. That’s when Apple gets punished on the Street.
Watch has already out performed iPhone and iPad out of the gate. The Street wants something they never got, ever. They are remembering through rose colored glasses. I give such analysis no value.
As for upgrades, one has to not get trapped into thinking like a tech enthusiast. This is ultimately a watch. People have rarely ever upgraded watches. They might have a variety of watches for different occasions (and for most people only a few unless they are a collector). That is where the bands come in.
And this is where tying into the iPhone has an affect, as well. I don’t think Apple sees Watch as an upgrade kind of device. It might get newer features, smaller components. I think Watch will likely come in new _styles_ even less frequently than the iPhone. I see no reason from Apple that they expect Watch to be a constantly upgraded piece of hardware, just like the current watch philosophy most people regard.
In other words, based on Apple’s history, the analyst who thinks Apple wants to “churn” will always be sorely disappointed.
Joe
“needs a cheaper version” has been said of all Apple products for years. Even less likely to happen now, all their product, hiring, … decisions point at them going even more luxury, not less.
What’s more likely to happen, I think, is the iWatch getting 2G, hence carrier subsidies, to obfuscate its price.
I think we have to bring together all the data points that we can trust. In your discussion, I don’t see how it fits the customer satisfaction data and the very swift initial sales (which exceeded the iPad).
$350-400 to get the Sport version maybe expensive, but that did not discourage millions of people (more that the first iPad) to buy it. Customer satisfaction is also very high, which strongly suggests that they found it useful. Also we know that sales skewed strongly to Sport, which at least partially refutes the claim that fashion/status is the main driver.
Instead of your claim that people are not buying the Apple Watch because it is expensive relative to the utility, the data that we know actually suggests the opposite. People *are* buying the Apple Watch and they *are* satisfied with the utility. There is also no evidence that dropping the price by $150 would significantly increase sales as of yet, although that claim cannot be neither supported nor refuted by what we already know.
“Also we know that sales skewed strongly to Sport, which at least partially refutes the claim that fashion/status is the main driver.” Nah, it’s called “sport” not “economy” for a reason :-p
I used the word “partially” just for you 😉
I always find it odd when Analyses trying to assess the success of a new
category of product based on the pass performance of another product’s category.
Each new category of product is unique, with a different market sentiment and undefined value, therefore any assessment or analysis of said product should always stand on its own.
Jan, LTE connectivity for the Watch means connecting directly to a cell tower. I’d like to know how something with a battery as small as the one in the Watch is going to do that without requiring very frequent recharging of the battery. And a vague statement such as “advanced technology” won’t actually explain it.
Some watches already do it. Granted, they’re bigger and uglier than their non-3G counterparts (which are already big and ugly, so hopefully there’ll be choice between small and autonomous), but it’s not an order of magnitude, 2x rather, which shouldn’t be a big hurdle now that the parts-maker ecosystem is focusing on watch-optimized parts (SOCs, batteries, screens,…)
“version that becomes independent of the phone, with its own LTE
connectivity, but it’s inevitable we’ll eventually get to that point.”
I think you’re confusing the power demands of microchips with the power demands of signalling to a cell tower. The first is subject to reduction via Moore’s law (up to a point), the second isn’t subject to being reduced unless you design a new standard that requires less power.
No matter how advanced the device, it’s still going to need to send out a continuous signal strong enough for the cell tower to detect and respond to it. In a watch, where no matter how you cut it, you’re dealing with teeny-tiny battery capacity, the demands of communicating with the cell network become a bigger factor than the demands of the microchip running things. I don’t think cramming a battery that can power an LTE signal for 18+ hours, plus handle a reasonable amount of actual talk time/data transfer, into an Apple watch case is ever going to be possible.
It won’t be possible and if anyone claims it will be, they need to explain, using transmit power numbers at the watch and received signal numbers at the cell tower, how it will be achieved.
I’m wondering if smartwatches won’t be going back to 2G to start with. Under the same conditions (a big assumption: basically, whichever signal is strongest consumes the least power, so strong 4G will probably consume less than crappy 2G, but let’s assume “same conditions”), 2G consumes a lot less power than 4G, while still letting you talk, send/receive IMs, emails and notifications, authentication tokens…
There are already a few 3G smartwatches, under Tizen or Android, some with a (crappy) camera even, so features-wise the road ahead is clear. I think Carriers will push the concept, since it’ll not only sell more contracts, but also a special (read: billable) service to allow us to switch from phone to watch w/o having to fiddle with their respective SIMs.
The one variable you’re not considering is improvements in battery life, which don’t have a named law associated with them, but are nonetheless marching forward at a steady pace. Don’t assume too many things will stay the same when making these predictions – it generally turns out to be wrong.
Wrong again. Battery tech is not actually improving much at all, despite huge amounts of trying. Energy density has been pretty stagnant. All improvements to battery life for devices in recent years have been due to reductions in power requirements for chips and screens on the one hand, and reducing the non-battery volume of the device (ie, apple’s terraced li-polymer batteries vs standard li-ion cells) on the other.
Say what ?
from http://kk.org/thetechnium/was-moores-law/
it’s awesome article. I look forward to the continuation.
Very well presented. Every quote was awesome and thanks for sharing the content. Keep sharing and keep motivating others.
There is definately a lot to find out about this subject. I like all the points you made