13 January 2015

Creative Strategies: “Two Scenarios for the Smart Watch Market”

Scenario #1

Apple will easily strongly influence the smart watch category in 2015 and 2016. It is hard to argue against Apple’s vertical advantage and tight control of their entire ecosystem. This advantage undoubtedly will give them a dominance in the early stages of a category. If a number of things play out, we can see them command the category for the long term.

Apple had a near monopoly on the iPod/MP3 market. We can see a similar scenario playing out where Apple effectively “iPods” the smart watch category, maintaining dominant share over the next five to seven years. While the early success of the iPod was driven by Apple releasing iTunes for Windows, we don’t see the need for Apple to support other platforms in order to hold sway over the smart watch category. Apple’s existing iPhone customer base is large enough to keep it the foremost smart watch vendor and their smart watch platform as the reigning one in the smart watch category.

Ben Bajarin

When you read phrases like Apple is blessed by their developers and always has been, you know this is a truly accurate and unbiased report!

Apple Watches

Sarcasm aside, the article linked here makes some questionable assumptions. First and worse, that the Apple Watch can break out like the iPod, while being essentially an overpriced accessory. There are two key differences between the Watch and the iPod (not counting price): first, the iPod can operate independently from your other gadgets. I was just talking a couple of days ago with a colleague who wanted an Apple Watch so that she could leave her iPhone at home when she goes to the gym. She immediately changed her mind when I explained that the Watch doesn’t work without an iPhone close by. Secondly, the iPod had a clear value proposition: a simple way to carry your music everywhere; the Watch currently has no ‘killer app’ or immediate use case, and it will probably be another half year before we start seeing something coherent in that direction.

I agree that developers will be key factor to the success – or failure – of the Apple Watch. But, given recent experiences with the Tunes store, I think developers will move into this new category with caution. They are more aware of the monetization issues, as the average app price is continually dropping. Developing an Apple Watch extension will probably be comparable in effort and cost to a regular iPhone app (at least initially), but, with fewer potential customers and low prices, the actual revenues will be negligible. I’m sure we will see many innovative apps from enthusiastic developers, but they will be quickly abandoned, or, best-case-scenario, acquired by bigger companies to enhance their own products.

There’s also the question of market size, which the article cleverly avoids. After all, could well be dominating the smart watch market, but it’s one thing to dominate a market with annual sales of 5 to 10 million units (like the current iPod market) and quite another if it’s closer to 1 billion, comparable to the smartphone market. The extended report linked in the article does name current figures for the wrist watch market, but the range is quite high: from the approx. 30 million Swiss-made watches to a total of 1.2 billion annually. And you can hardly consider a 750$ Swiss watch the same product as the billion 3$-a-piece Chinese-made watches! In the short term, the Apple Watch can only compete with the higher end Swiss watches, so the annual sales could be as high as 30 million (assuming none of these sophisticated customers buys Android Wear) or as low as 6 million (since Apple Watch will forcefully be limited by the market share of the iPhone). In the long run (5 to 7 years), some people might argue that smart watches will replace their dumb counterparts just like the smartphone did with regular mobile phones. Again, I have my doubts that the billion people buying Chinese watches will be willing to replace a 3$ purchase with a 50$ purchase, when for that same price they could be buying a much larger and more capable smartphone.

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