Fishing With A Hand Grenade: How The Apple Watch’s Value For Money Might Be Mismatched
Compared to the competition, Apple pushes manufacturing quality to the limits. However, given the relatively short lifespan of its wearable products (measured in years as opposed to decades for traditional watches) it makes one wonder if the means are well suited to the end.
With more than 125 million units sold to date and prices ranging from USD 279 for the SE up to USD 1,399 for the Hermès in December 2020, the Apple Watch is a marvel of consumer electronics engineering. However the Cupertino company announced in June 2020 that its latest OS release watchOS 7 would officially drops support for the Series 1, which brings the life expectancy of an Apple Watch between five and seven years.
As a professional of the watch industry, I can’t help to wonder why Apple uses cutting edge metalware (which can easily last decades) on a watch that they don’t plan to support for more than half-a-dozen years. In my opinion as a trained goldsmith, Apple is overkilling it with the manufacturing. The price reflects that, but I wonder if it is not wasted on a product that has a shorter inventory turnover, lower margins and that is not expected to work more than 10 years at most.
PLANNED NON-OBSOLESCENCE VS UNPLANNED OBSOLESCENCE
I am typing these lines while wearing a 1960s Universal Genève. At the beginning of the month, a watchmaker completely dismantled its mechanical parts, cleaned them up and put them back together. Prior to that I had myself given a polish to the 18K gold of the case and lugs.
The watch now works as good as when it was worn by its very first owner in the 1960s. It perfectly illustrates how traditional watches are usually intended to last much longer: their non-obsolescence is planned.
The Apple Watch on the other hand is made of hardware, firmware and software. Every year, the software has thousands of lines of code replaced and thousands more added to account for new features, new hardware or for fixes.
This means that ultimately, the software grows to a point where it can no longer run properly on the hardware. Considering that Apple keeps trying to be at the cutting edge of technology, this race to keep upgrading the software and the hardware creates an unplanned obsolescence.
INVENTORY TURNOVER
One way of measuring the performance of a product category is by how fast inventory sells.
Lately, Jewellery retail has had an inventory turnover of more than 200 days. As for fashion and watches it is around 100 days, which might explain the popularity of fashion watches: they sell as fast as apparel.
When it comes to wearables, the inventory turnover is between 50 and 80 days depending on the brand. This means that if you run a retail business, you can sell wearables 1½ to 2 times faster than apparel or watches.
This also means that you need to have a higher markup on watches and apparel to pay rent, salaries and bills. Inversely, you can put a lower markup on wearables since you can easily sell more of them.
As a consequence, the margins slapped on Apple Watches and wearables are lower than those from traditional watches.
MANUFACTURING GRADE
In its day, my Universal Genève watch was a premium core product. Over the past 60 years, the technology that was used to manufacture my it has become more affordable and it has been replaced by fancier and more expensive technologies.
In essence, a $200 modern day traditional Fossil watch is probably built as good as my 1960s watch, but it also means that a $5,000 Rolex is three or four realms away from the Fossil.
What more do I get from the Universal than from the Fossil?
Well to begin with my Universal is made of 18K gold and is probably worth two times more than what I paid for it, including the overhaul. The Fossil value on the second hand market keeps heading for zero.
FISHING WITH A HAND GRENADE
Traditional watchmakers try to find a balance between using the best manufacturing for their price point and keeping the cost under control. This is paramount because as illustrated by the example of the inventory turnover, traditional watches will have a higher markup and sales tax slapped on them. Compare it to fishing with a line.
Apple on the other hand operates with razor thin margins: if they spend more on machining, it will not have the same impact on the final price as it has for the watchmaker. However they run into 2 issues:
- Metalware requires much more manual labour than electronic components. So it costs more to manufacture external watch components than it costs to manufacture the inner parts of an Apple Watch.
- Apple indiscriminately chooses expensive manufacturing processes such as CNC machining, which further raises the cost. Traditional watchmakers only reserve those for watches above $10,000.
The consequence is that the Apple Watch has a much higher manufacturing cost than a traditional watch, but the razor sharp margins of consumer electronics puts it in the same price bracket. Compare it to fishing with a grenade.
So with all that said, yes the Apple Watch does indeed provide an unmatched value for the money, but I can’t shake the feeling that the unplanned obsolescence of its hardware makes the brand’s efforts redundant. You get plenty of fish with a hand grenade, but the whole bay has been killed off.
