The Apple Watch Is More Than a Cool Gadget

in FP: Stock Analysis

“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 were 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 moatagainst 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.

Originally published on Institutional Investor

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