Apple looks to face down Watch critics

Few tech products are as polarising as the Apple Watch. Even before it was revealed in September 2014, it has divided consumers, investors and tech pundits alike.

For some, it has excelled where other smartwatches have failed, seducing consumers with its classy design and posing a threat to Swiss watchmakers. Others claim it is a clunky dud that never lived up to its fashionista billing, failed to create the promised new app platform and barely registered financially next to the iPhone.

Entangled with both perspectives are questions of whether Apple can still innovate or if it will find another hit product as profitable as its smartphone.

Apple’s refusal to reveal Watch sales figures has only fuelled the argument. On Tuesday, Apple finally took its first steps towards revealing the Watch’s performance by indicating that total sales for its “wearable” products exceeded $5bn over the past 12 months.

Tim Cook, Apple’s chief executive, told analysts on Tuesday’s earnings call that revenue from “wearable products”, including Apple Watch and its headphones, Beats and AirPods, “in the past four quarters was the size of a Fortune 500 company”.

Discount clothing retailer Burlington Stores, the lowest-ranked member of the Fortune 500 by revenues, posted $5.6bn in sales for its most recent fiscal year, according to regulatory filings, giving analysts at least a hint of the figure Mr Cook had in mind.

Watch revenues are included in Apple’s “other products” category, with the declining iPod, Apple TV box and various accessories, where sales in the March quarter grew 31 per cent year on year to $2.9bn. That is much smaller than iPhone sales of $33.2bn in the same period.

“Other products” also include its new wireless AirPods, which were released in December and have seen demand “significantly” exceed supply. With Mr Cook adding later that its wearables business would be “well into the Fortune 500”, analysts have assumed that the ad hoc division is turning over close to $6bn a year, including Watch sales of more than 3m units in the past quarter alone.

Gene Munster, the former Apple analyst turned tech investor at Loup Ventures, estimates that of the $6bn total, about $4.7bn came from the Watch. “It’s a good reminder that this is a real business,” he says. “Cook is trying to say, ‘Don’t write the Watch off’. More broadly, he is also introducing the idea of AirPods as a wearable — most people think of it as a simple accessory.”

After Watch sales “nearly doubled” year on year, the Apple chief was quick to take a victory lap. “That’s pretty fast to come that far,” he said. “We couldn't be more satisfied with it.”

Just how satisfied Apple watchers might be depends on what they decide to compare that $6bn figure with. Its closest rival in wearable technology is Fitbit, which has long led the fitness tracker market with wristbands that cost between $60 and $250. San Francisco-based Fitbit, which was founded in 2007, reported annual revenues last year of $2.2bn — perhaps a third of Apple’s total — and has been cutting staff after sales fell in recent quarters.

Including headphones, Apple’s wearables business is approaching the size of another former wristwatch disrupter: Swatch Group. The Swiss owner of 18 watch brands including Omega and Longines, as well as its populist namesake, had net sales of $7.6bn last year. Apple Watch probably also outsold Swatch’s US rival Fossil Group, which posted $3bn in revenues for 2016.

Nonetheless, it is hard to make the case that the Watch has been an outright success. “A $6bn business is pretty sizeable but when you put that in the context of the iPhone’s install base, by Apple standards, it undoubtedly falls short of initial expectations,” says Geoff Blaber, analyst at CCS Insight.

Sales fell year on year for several months during 2016, according to market researchers at IDC. After a solid-gold model costing upwards of $10,000 was jettisoned last year at the same time as the entry-level price was cut below $200, Apple may be sacrificing profitability for scale.

Even so, the total number of users is struggling to win the attention of app developers. This week it emerged that Amazon, Google Maps and eBay had all quietly pulled support for their Watch apps.

“It’s slowly catching on,” says Mr Munster. “But it’s not to the point where it’s blowing everyone out of the water.”

Even though Watch revenues are far from the iPhone’s, a “constellation” of wearable devices could mean the smartphone one day becomes less important. Already, the Watch and AirPods work wirelessly together so that users can control the music in their headphones from their wrist or answer a call without needing to touch their iPhone.

Perhaps more important than the Watch’s historical performance is Apple’s signal that it remains committed to the wearables category, despite its challenges. “It’s already a big business and we believe over time it will be even larger,” Mr Cook said on Tuesday. “Where does it go? I wouldn’t want to comment on that but we do have a really great pipeline here.”

There are a few hints as to what that pipeline might include, as Apple’s engineers refine the miniaturisation technology and bespoke silicon chips that power its growing collection of wireless accessories.

Apple’s patent filings have hinted at expanding its AirPods, dubbed “hearables” by some, to include health-monitoring capabilities. People familiar with Apple’s plans have said that R&D work is intensifying on a pair of “augmented reality” glasses, although any launch is at least a year away. Such a move could eventually put the merging eyewear groups Luxottica and Essilor’s combined $16bn-a-year sales in Apple’s sights.

“We are already seeing the battle for the wrist. The battle for the ears is only just beginning,” says Neil Cybart, an independent Apple analyst at Above Avalon. “Down the road, there will be a battle for the eyes.”

Additional reporting by Adam Samson