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The Apple Watch Is More Than a Cool Gadget - Institutional Investor (blog)

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“You know how difficult it is to explain to a nonparent
the joy of having kids? The Apple Watch is the same thing.
It’s hard to explain how great it is to someone who has
never worn one.”


The other day I found myself using this line to explain why
I love the Apple Watch. And just as those words came out of my
mouth, I realized how I had just cheapened my kids, comparing
them to a gadget. So, Jonah, Hannah and Mia Sarah — my
apologies.


The Apple Watch, as well as many other Apple products,
doesn’t make a lot of sense in theory, but in practice it
does (I am borrowing from Yogi Berra here). I’ve been
wearing an Apple Watch for two and a half weeks, and I have to
tell you, this is not a watch; it’s an iPhone
extender.


If the
Apple Watch
was called an Apple Band instead, our
perceptions and expectation of this product would be very
different. When Apple reinvents a category of products, our
initial analysis is stuck in the old paradigm. I remember in
2007, when Apple came out with the iPhone, that commentators
were arguing that no one would want to watch movies on its tiny
screen. And how were you going to stick a DVD into this little
phone? Okay, I made up that last part, but we’re destined
for trouble when we try to apply the functionality we associate
with an existing product to a new device that has little
resemblance to the original one. That, of course, is the
problem with the Apple Watch, even though we wear it on our
wrist, it tells time, and Apple did call it a watch.


Being wearable is what makes the Apple Watch so useful. We
may always have our smartphone with us, but it’s not
always on us. For instance, my iPhone is on the kitchen table
and I’m in the living room, and a call comes in. I
don’t have to run to get my phone, stumbling over my
kids’ toys; I can just answer the call on my wrist.
It’s very Dick Tracy, but it works.


Most people won’t appreciate the on-your-wrist factor
until they wear the Apple Watch for a while. In the past
I’d miss phone appointments all the time: I’d have a
call scheduled, I’d be engrossed in research while
listening to music, and I wouldn’t hear the reminder about
the appointment in Outlook or on my iPhone. Apple’s
vibration reminder gets me to look at my watch every time.


One of the arguments I heard against the Apple Watch —
just as I did against the iPhone in 2007 — is that the
screen is so small that no one would want to read on it. Here
is what I found: When my son texts that he wants me to pick him
up from school in 20 minutes, I get the message on my watch. It
emits a slight and not unpleasant vibration, I glance at the
text, and I can reply right away.


That brings me to another no-no I heard about the Apple
Watch: The screen is too small to type on. That’s true,
but it doesn’t matter, because the Apple Watch comes with
an absolutely amazing version of Siri. Its voice recognition
software understands me absolutely flawlessly, even with my
Russian accent. I’m not sure how, but it’s better
than iPhone’s Siri. When my son’s message comes in, I
have a few options. I can hit Reply and dictate my message
through Siri. Or, there are a lot of preconfigured buttons that
show responses like “OK” and “Thanks.” If,
on the other hand, my son sends me his five-page essay to look
at, I won’t read it on my Apple Watch — Why would I?
It’s not made for that.


The design — how the watch feels to your fingers and on
your wrist, and the ease of use — is what you’d
expect from Apple. Even the battery life is much better than I
anticipated: It lasts more than a day and charges quickly. I
put my Apple Watch on the charger when I get up, and before I
leave for work, it is fully charged. It rained for two weeks
nonstop where I live, in Denver (when I travel to Seattle this
week I’ll feel at home), so I didn’t have a chance to
test the watch while riding a bicycle to work. But even with my
limited testing, I concluded that the Apple Watch is a terrific
product.


Just like Apple’s first iPhone, this watch doesn’t
have many apps, and the first few I tried were not quite ready
for prime time. It will take time for developers to figure out
how to make great apps, just as with early versions of the
iPhone.


Now that you’ve invested your time in reading this, let
me disappoint you. This is not a product review. A product
review has to be rigorous — testing all features of the
product in different situations and conditions. I did not do
anything dangerous: I did not scuba dive or parachute wearing
the Apple Watch. I did not even exercise with it. The product
needs to be compared with competitive offerings. I didn’t
do that either. And, most important, the reviewer has to be
unbiased. I am a very biased Apple junkie. On my last two-day
trip, I had four Apple products with me: a MacBook Air, an
iPad, an iPhone and my Apple Watch. I am not even going to try
to pretend that I’m unbiased.


But here’s the good news: I am not the only one. There
are something like 800 million very biased Apple users out
there, and a lot of them will agree with me.


Figuring out the impact the Apple Watch will have on Apple
in the short run is very difficult. Apple sells about 180
million iPhones a year. Unlike the iPhone, which became a
necessity, the Apple Watch may be a great product, but it is
still a luxury. If 10 percent of Apple customers buy an Apple
Watch and its average selling price is $500 (my best guess),
that would bring in … well, and here is the problem. Should I
use 10 percent of the total Apple user base of 800 million? In
that case Apple Watch sales would bring in $40 billion of
additional revenue. On the other hand, Apple sells about 180
million iPhones a year, and if 10 percent of annual buyers get
an Apple Watch, that would bring in $9 billion of new sales.
The annual revenue range — $9 billion to $40 billion
— is huge, but regardless of where sales fall, the Apple
Watch as a standalone division would qualify to be an S&P
500 company. However, in relation to Apple’s $200 billion
in current total revenue, the watch would boost total sales 4.5
percent to 19 percent — somewhere between insignificant
and a lot.


However, even if sales come in closer to $9 billion, in the
long run the Apple Watch will be an important product. As
technology improves and the price falls, it will gradually
transition from being a nice-to-have to a must-have item, the
attachment rate will rise, and the impact on Apple’s
bottom line will grow.


But even more important, the Apple Watch will increase
Apple’s competitive advantage. Its seamless integration
with iPhone and iCloud widens
Apple’s moat
against its competitors, increasing the
pain and isolation for those who dare to use Android.


The Apple Watch answers a question that is paramount for the
company’s future: Can Apple innovate without Steve Jobs?
Until this watch, Apple was just improving existing products
conceived under Jobs (a larger-screen iPhone is not an
earth-shattering innovation). The Apple Watch, which takes the
company into a brand-new product category, was conceived and
designed by post-Jobs Apple. It is a terrific product, and Jobs
would be proud of it. But then again, that’s coming from a
geek who is comparing parenting to high-tech gadgets.


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