A watch for whom?
What is the market for Apple’s wearable device?
So Apple has finally revealed their latest product line on September 9, 2014. As the company is widely expected to set the standards for this new market, it’s a good time to reflect on their choices and what they mean about the future of smart watches.
Is the Apple Watch really a watch? Not quite, but more so, I’d argue, than most of their “smart” competitors. Let’s look at the value expected from the ownership of watch, and how the Apple Watch delivers on each of them.
What is expected from a watch?
People buy watches for several reasons.
Aesthetics and design
Every electronic device is able to tell the time, and clocks are everywhere. Watches are now primarily worn as modern jewelry, and their aesthetic value is the most critical.
Apple has usually been better than its tech competitors in this area. Will the Apple Watch stand the test against mechanical models? It remains to be seen, but at least they have the design firepower to compete.
One criticism, at this stage, could be made regarding the thickness of the device; we can already anticipate how next generations of the product will be “thinner, more powerful”.
Brand and status symbol
That warm feeling people get from knowing you’re wearing a Rolex (for example), and from the promise of quality, selectiveness, that comes with it. Sometimes, it’s enough to get clients to spend much more than they would for the “regular” product. Plus, if one wears an expensive brand, it tells everybody that they’ve made it big in Hollywood.
Apple has been able to create a similar aura around its products, even though it may not project the same level of elitism as high-end watch makers.
Competitors, meanwhile, have yet to gain this kind of prestige.
Mechanical sophistication
High-end mechanical watches rely on old fashioned cogs, but also on all kinds of sophisticated mechanisms that are highly appreciated by collectors. Watch makers uses these “complications” as differentiators to drive prices higher.
If you buy an Apple Watch instead, you will get some technical sophistication, but only of the electronic kind. Here we reach a first line of divide : some people will be rebuked by the “digital”, since it has always been associated with cheaper, industrial devices; others may be attracted by the technological performance.
This is mostly true for real high-end watches, however. Buyers of mid-market models (costing, say, around $349) probably care much less about such considerations.
Personalization
What we wear is a statement about our tastes, the image we want to project, even our values.
To do so, we need choice. The current watch market provides an ample array of designs, but each individual model has few options. The Apple Watch, conversely, comes in 2 sizes, 6 metals (counting color variants), and a large number of straps and bracelets. By combination, it allows for a very large number of models (litterally dozens).
This is also much more than the options provided for other smart watches.
Functionality
A mechanical watch is mostly used to know the time, with maybe a calendar or a chronometer added. This functionality is now so widespread that it has become almost irrelevant.
By contrast, the Apple Watch (any smart watch, indeed) offers a huge array of features, and it is set to grow. I will not discuss here which ones are the most convincing or the biggest breakthroughs, but there seems to be a number of realistic use cases. Apple wants to dominate the smart watch market, and it will at least belong firmly in the top tier.
I suspect there is a plan here: buyers may be attracted by the novelty of the Apple Watch, but the utility gained from the device would convince them to stick to it, instead of rotating between models as many owners do (which is an issue for an always-with-you device).
Durability
Another marked difference : mechanical watches are supposed to last for many years, while a tech device (especially a 1st Generation) will become obsolete pretty soon. Jewels aim for eternity, but tech is ever changing and improving.
As a friend of mine remarked, this is especially problematic for gold models; it will be hard to spend several grand on a watch, only to have it look outdated and outperformed after one or two years.
Conversely, the less expensive models will not suffer much from this. In the $300 — 500 bracket, you don’t find many expensive swiss watches, those Patek Philippe passed from one generation to the other, but rather brands like Fossil, which generate less commitment. Apple has less to fear from those competitors.
Autonomy
Always a concern for modern portable devices, the battery life of smart watches is a glaring weakness compared to traditional models. For this most portable of devices, having to carry the charger with you whenever you leave home for more than a day is a real problem. We don’t know yet precisely how the Apple Watch fares, but there is reason to be pessimistic.
Is it really a watch?
Even though the Apple Watch is marketed as a watch, and even though it can tell the time in a classy fashion, this is indeed a different beast, standing between jewels and tech devices. Apple offers a trade-off between the loss of old-fashioned mechanics, lifespan (which are not that big a deal in the $349 watch space), autonomy, and a huge gain in functionality, while betting they can provide comparable or better aesthetics and brand image. It’s a value proposition that few, if any, other players in the tech industry will be able to replicate.
One of the most astute tech bloggers has wondered about the intended uses of the Apple Watch. Is Apple trying to catch too many birds at once? Although these interrogations are legitimate, this product is, at its core, a computer, i.e programmable; and similarly to other touchscreen devices, it is a blank sheet of glass that can be adapted, morphed into many different things. The variety of uses is built-in.
Instead let’s look at the profiles of buyers, and especially early adopters. Who, exactly, is going to buy this product?
The market for the Apple Watch
Before this week, I expected smart watches to target 2 populations :
- The health-conscious and serious sport practitioners, interested by biometric data.
- Gadget buyers, who would like to own a stripped-down smartphone, able to send alerts, show messages, and display contextual information at their wrist.
- But Apple have decided to position their product as a watch; i.e. a jewell that tells the time with high precision. They want it to be a temptation for potential watch owners.
These 3 populations are only the initial targets, a first support that will help the product grow. Once it takes off, the combination of new hardware and interaction methods with the creativity of developpers should lead to many unforeseen uses, as has been written by the ever-insightful Horace Dediu. The first seeds have been sown by Apple, which would make the watch a “new intimate way to communicate”. In turn, these new uses will redefine the product itself, and whom it is for. We are not there yet, however.
The initial addressable market may look large, but several restrictions apply.
You need an iPhone.
The Apple Watch gets its internet connection from iPhone. It’s the first time since the launch of the original iPod that an Apple product is so dependent on the ownership of another one. Unsurprisingly, other brands of smartphones are out of the picture. Apple seems to bet that either:
- The Apple Watch will draw more switchers towards the iPhone — the Watch would play the role of a supporting product. It might happen over the next cycles of upgrades (especially given how the iPhone 6 and 6 plus are intended to seduce current Android users). But there may be a psychological barrier in purchasing a smartphone worth several hundred dollars, just to have the right to buy a $349+ device.
- There are enough iPhone owners, and the potential market for the watch is already big enough. It’s a good indicator of the ambition Apple has for this product.
According to Tim Cook’s presentation, there are currently in the world more than 200 million owners of eligible smartphones (iPhone 5 and above). Even accounting for the iPhone 6, which we can expect to sell in even larger numbers than its predecessors, this market will probably not reach more than 300 million people by one year.
To compare, at the launch of the iPhone, the population of cellphone owners was much larger (for lack of a better proxy of the potential market).
What is the percentage of premium watch buyers who own an iPhone? I suspect it is much higher than the global market share of Apple’s flagship product. Yet, we are now looking (for the target number 3) at people “who are interested in quality watches AND own a recent-enough iPhone”. And this, if they even consider this purchase at all.
It will turn off some watch buyers.
As mentioned above, the lack of mechanical complications, shorter life span, lower autonomy and “digital” aura could prove a show-stopper for many people, even when they are appreciative of the product’s quality.
How many will remain? That is a billion-dollar question. My bet: enough to keep the apple rolling (ha!), and more over time, as the notion of a premium digital watch gains acceptance.
Apple will not cover all price segments.
The watch market has a very high dispersion in terms of prices. Setting aside throw-away quartz watches that you can buy for a few bucks, prices range from tens of dollars to hundreds of thousands. For the most affluent customers, watches work like Veblen goods: the more expensive they are, the more attractive they become. In this rarefied world, the sky is the limit.
Unlike what they have done with other products, Apple will not own the high-end of the watch market. With prices starting at $349, they position the new product as the now-classic “affordable luxury”, with a bit of upside for gold models (I’m sceptical about those). This makes for a significant number of potential purchasers, although it leaves out the most profitable ones.
This space is also much more open than the high-end. In spite of all the talk about how Switzerland is, hem, in a bad shape, Apple is taking on a less exclusive market with its entry-level watches. There are no Rolexes here, only Tissots; Apple’s design and brand power may well be enough to compete.
Can you smell the money?
Based on all these restrictions in adressable market and in use cases (as studied previously), it looks like smartphones will remain in the future the computer that people always carry around; smart watches (including Apple’s take on it) will be for fewer people.
However, I expect Apple to profit nicely from this new, smaller category, because they will remain alone in their niche for some time: tech companies will have a hard time competing on brand and aesthetics, and watch makers lack the computer expertise. One caveat, though: this new product line is not going to diversify Apple from its reliance on the iPhone, on the contrary. If future iPhones don’t sell, the Watch’s adressable market will be affected as well.
While tech competitors have produced computing devices that replicated the form factor of a watch, and ended up with gadgets, Apple has strived to reproduce its user value (or part of it), and to combine it with the power of wearable computing. It is today the only tech company addressing the existing market for watches with any credibly. This way, it is making the smart watch market bigger, but only for itself.
