When the new iPhone was announced last month, Apple also made some curious moves regarding the Apple Watch. It (1) discontinued the original model (2) came out with a new model, called Series 1, that replaced the original albeit for $80-100 less (3) announced a Series 2 model whose benefits over the Series 1 were decidedly limited (4) priced the Series 2 almost exactly where the original Apple Watch was released in early 2015. Aside from being confusing, the one thing that was seemingly a safe bet was that lower pricing would equal more sales. That -- combined with the additional 4 months of selling period in 2016 -- should have guaranteed a solid second year for Apple Watch. A leading Apple watcher says it won't.
Wet, but why? Apple's marketing for the Series 2 Apple Watch is heavy on references to its... [+]
KGI Securities analyst Ming-Chi Kuo is often credited with keen observations regarding Apple. In fact, the Business Insider article on his latest Apple report is titled "The most accurate Apple analyst in the world says Apple Watch sales will shrink this year." But for all Kuo's success in sleuthing out through Asian supply channels what features will and won't make it into Apple's iPhone each year, the distillation of his logic regarding Apple Watch makes little sense -- arguably as little as Apple's product lineup and naming. Let's dissect both of those here.
Kuo's numbers
According to Business Insider, Kuo's note reads as follow: "[W]e revise down our 2016F shipments projection for the entire Apple Watch line from 10.0-10.5M units to 8.5-9.0M units (vs. 10.4mn units in 2015). We now predict 2016F Apple Watch sales will decline from 2015 (with shorter selling time of eight months)." In short, he believes that Apple will sell about 10-15% fewer watches this year than it sold last year.
But Kuo believes the more pricey Series 2 will do better than he first estimated, upping its sales target by 10%. That's where things start to get weird. The Series 2 was available for pre-order the same day as the iPhone 7. If you ordered one then, you likely have received it. Since launching in late September, however, Series 2 has gone AWOL. You can't buy one in any Apple Store I've been able to find (and I've checked many states across many stores over many days). When store availability first started to show up, it was for November 3, which has since slipped to November 8.
While it's true if you ask for direct shipping Apple estimates a slightly shorter 3-4 weeks, it's also worth mentioning that's the lowest shipping estimate since the launch. It was weeks longer until recently, suggesting that after the initial supply nearly no Series 2 watches will have been available anywhere for around a month.
Upgrade, what upgrade?
But perhaps that's not so much a problem for Apple. While both Series 1 and 2 have substantial internal upgrades from the original watch (which some now call Series 0), there is little to separate them from each other. The sole differentiators are water proofing on Series 2 (vs. water resistance on Series 0/1) and internal GPS. The latter feature is very appealing to runners and cyclists who want to leave their phone at home and still get accurate mapping of their path. It's irrelevant to nearly everyone else, who likely has a phone with them which can feed the watch GPS data just fine. As for the improved waterproofing, it should be note that many people successfully swam with the original water resistant Apple Watch. The new feature is a nice to have, but hardly a need to have for most.
There is, in short, little rationale for the vast majority of consumers to purchase a Series 2 Apple Watch. And with little availability, it seems odd that Kuo would believe now that Apple will sell more than he first believed. The Series 1, on the other hand, is poised to be a hit.
Supply and demand
If you want an Apple Watch and just can't wait, I'm seeing availability of Series 1 in scores of Apple Stores across the U.S. and almost immediate shipping. And that Series 1 Watch has a compelling feature: It's $100 cheaper than both Series 2 and also the Series 0. (Technically, that's true for the larger 42mm model only; the smaller 38mm model is $80 less expensive than its Series 0 sibling.)
It should go without saying, but typically cutting prices so substantially -- this is a full 25% lower than last year's model at $299 -- results in increased sales. For Kuo to argue it won't is actually extraordinarily bearish. When price cuts don't goose sales, there are a finite number of reasons. One is that the product has saturated the market; if everyone has one, you can't get people to buy more just by charging less. While this is true of flat-panel TVs in the U.S., it's hardly true of Apple Watch which currently is on the wrists of fewer than 5% of iPhone users.
The second reason a price cut might not help is if the product in its current phone is essentially dying off. Anecdotally, that seems not to be the case. I've spent a fair amount of time in New York, the Bay Area and Seattle over recent months and the Apple Watch is more and more visible across all three. Everyone I ask reports high satisfaction with the product. While this isn't a statistical sample, it does suggest that the Watch -- which suffered a bit of identity crisis at launch -- is finding a niche among the Apple faithful. (Personally, when I seriously contemplated an Android switch over the summer due to some lousy iPhone performance, it was the inability to use the Watch that kept me in the Apple fold.)
Finding its place
While the Watch would surely be more of a stocking stuffer this holiday season if Apple could've found a way to lower pricing to $199, it seems that at $269/$299 it will likely be quite popular in late 2016. The features that make it most compelling, are nearly all improved this year vs. last whether that's through better functionality (Siri, fitness tracking) or better availability (music, Apple Pay).
But Kuo suggests that the core failings of the Apple Watch will continue to limit its appeal to "hardcore Apple (US) fans ... rather than by the mass market." He cites four main weaknesses in the product (1) no killer apps (2) poor battery (3) reliance on iPhone (4) a criticism of multi-touch user interfaces for wearables.
It seems likely he doesn't wear the Apple Watch, but I'd suggest that fitness features and notifications are both killer apps already. In fact, the list of things the watch does well is so compelling, I'd very much hate to be without it on a daily basis. Kuo remains bullish on Fitbit in fitness tracking suggesting Apple hasn't hurt the company at all. But shouldn't lower prices that encroach on Fitbit's territory create an opportunity for Apple? Kuo says no.
Heard this before
As for the rest of the list, it's both fair and not. The Apple Watch needs daily recharging (with rare exceptions). This makes it as reliant on an AC outlet as, well, the iPhone. In fact, it's charge very rarely requires topping off during the day, unlike an iPhone. Could the battery be better? No doubt, but the problem with battery life is that the next really compelling step from a one-day battery isn't two days but rather seven. If you have unpredictable charging needs on your wearable, you're very likely to find it out of juice now and again -- ask any Fitbit user. With Apple Watch, you park it next to your phone at night and both are good to go each morning,
As for functionality free from the iPhone, its fair to note that Series 0/1/2 all have been limited when your iPhone isn't nearby. They can't answer calls, can't receive notifications, can't run most third-party apps. They do keep time, do allow Apple Pay use, and can be pressed into service as a fairly nice wearable iPod. But that's most of it. For now, that makes Apple Watch an iPhone accessory not an iPhone replacement. It was always going to have significantly smaller sales in that role but it's hard to believe those sales won't grow over time.
What makes Kuo's suggestion they won't most curious of all is that the Apple Watch doesn't use multi-touch functionality at all (if the term is unfamiliar, think about the pinch-to-zoom gesture for an example of using two or more fingers to manipulate a device). With the recent WatchOS 3, in fact, its user interface is significantly simpler than it was last year -- yet another factor that should lead to increased rather than decreased sales.
Confusion reigns
Yet for all the reasons Kuo might be off the mark a bit here, he seems to have missed one reason sales might well fail to deliver. Apple has created a product lineup that's even more confusing than before when the product names (Apple Watch Sport, Apple Watch and Apple Watch Edition) alone could confound. Calling a significantly updated model "Series 1" incorrectly implies that it is the first Apple Watch. It isn't, given the much faster processor inside the new S2 system-on-chip that powers it. Apple is underselling there.
Further, while the idea of a barely more capable model being $100 more isn't new to Apple, Series 2 breaks some new ground here in the category of "We're calling this is an upgrade, but..." If Series 2 needs some taglines, Apple could start with: "It's not just capable of handling rain and a shower (and an occasional swim, wink/nod), you can really go swimming in it." "It has its own GPS, but it's not like you can be out without your phone and ask it directions." Neither of this will matter to 95% of buyers. Engadget agrees with me here that most folks should just save their money and buy a Series 1.
Unless, of course, you need or want those features (think triathletes). Or perhaps you want the Nike variant, which allegedly ships later this month (though Nike stores have no idea when that is), as that only comes in Series 2. For all of Apple's marketing prowess, the Watch remains a mess in that respect, with a stainless steel offering that's $200 more expensive than the basic aluminum models and bundles that continue to confound easy explanation. But more on that in an upcoming post.
