Hints Suggest Apple's iWatch Nearly Ready For The World; But Is The World Ready For It?

A recent series of trademark filings on the term iWatch lends more credence than ever to rumors that Apple is working hard on delivering a wrist-wearable companion to its popular iPhone, perhaps sometime before the end of the year. Apple Insider reports the filings cover everywhere from Taiwan to Turkey, as well as Japan, Russia and Mexico. This news follows on rumors that Google is developing its own smart watch to counter Apple. And to top it off, the Pebble, which really brought the category to people's attention after a hugely successful Kickstarter campain, might be headed for Best Buy as soon as this weekend. Suddenly, the moribund watch category is the hottest category around. Or is it?

Wearables are, in fact, hot

The wristwatch itself is something of an anachronism, but the market for watches is actually pretty robust, with more than $40 billion in annual sales. (Earlier data in 2013 suggested a $60 billion market, but I can find little evidence to back that up. On the other hand, Benedict Evans has this graphic reminding that just 2% of watches account for 39% of revenues.) Movado, Fossil and Swatch have all seen their stock prices soar since the end of the recession. Yet, the excitement in the category isn't about traditional timepieces, but rather bits of technology that work alongside smartphones as companions of one sort or another.

Sony , in fact, has been selling a product just like this for quite a while now. While it only works with Android phones, it offers at-a-glance access to things like Facebook and Twitter updates as well as text messages. It also gives you control over the music playback on your phone. What it doesn't do is sell well or garner much in the way of positive reviews. "Great concept, poor execution" and "Has a lot of potential" are the highlighted comments on Amazon. (The former is the negative review, the latter is somewhat favorable.) It's noteworthy that some question the value even though the SmartWatch is currently $99 or less.

By contrast, $99 will get you a Fitbit Ultra or Flex from the folks at Fitbit and you'll have to spend $129 for a Jawbone Up or $149 for a Nike Fuelband. All of those are wearable "activity monitors" that track how much moving you do in a given day by some measure. While they vary in whether they have a display (the Fitbit Ultra and Nike Fuel do), all are designed to work in concert with your phone to encourage you to move around and get, or stay, fitter. And that category is exploding, with ABI Research forecasting it will hit 170 million units by 2017. The explosive growth here is certainly bullish on charging somewhat more than $149 for a device more capable than a simple activity monitor.

But what does Apple do here?

One thing that seems likely is that an iWatch won't make a huge difference to Apple's financials. If we take some rough numbers like a $199 retail price -- higher than the somewhat clunky-looking Pebble but still comfortably below the $299 I believe Google Glass will be at by next year (as well as the spouse-approval threshold) -- even selling 30-40 million per year would put the revenue impact below that of the iTunes/App Store combo for Apple. And it's unlikely people will find the need to upgrade their iWatch as frequently as some other gadgets, although it's possible that multiple designs might encourage people to own more than one over time. That certainly has worked with watches.

Yes, there has been talk of 60 percent gross margins, but for Apple, even the high-end case would likely only boost earnings by 10% or so. Likely, the impact on the bottom line would be more muted.  So why then even bother? The answer has to do with furthering the lock-in around iOS and encouraging people to stick with iPhones and iPads by making the experience that much more compelling. It's worth mentioning that I grab by Fitbit every morning as religiously as I grab my phone and I'm certainly a good target for a smart watch -- whether or not it's from Apple -- that integrates those functions but also offers something more.

Whether that something more delivers the goods for millions of folks is going to be the challenge for Apple. As I discussed the last time, one idea around the iWatch was that it would ask as a passive security device, allowing you to log into everything on your phone without a password. But rumors abound that the next iPhone will do that via a fingerprint sensor. Aside from the fitness functions and the kind of things Sony has done with their product, it's not obvious that Apple's watch will have a killer app to justify its purchase, whatever the price ends up being. But that said, Apple's track record is strong here and rather than bet against the success of the iWatch, it is likely that it will be something of a hit even if it isn't a game-changing piece of technology.

Much as later versions of the iPod were sleeker and incorporated upgrades that were impossible early on, the iWatch has the potential to make the iPhone experience better both through security and through easier casual use. What the Pebble proved is there's at least some early-adopter desire to have ready access to the endless stream of notifications your phone is providing without handling the phone itself. What Apple is good at is packaging that kind of experience in a way that its customers crave it. Still, to make this work in a gender-neutral way requires a pretty small screen. And to make it work without a lot of grief requires a streamlined user interface like what's on the latest version of the iPod Nano.

Apple certainly has what it takes to thread the needle here and make a hit out of the iWatch. The big challenge is that even a category like fitness trackers (or phone companions) is small compared to the smartphone universe itself. Of course, they know this in iPhone land and so it's safe to assume even if the iWatch is the next pretty big thing, something larger is still in the works at Apple.

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