After three long years of rumors, Apple (NASDAQ:AAPL) finally struck a deal with China Mobile (NYSE:CHL). Rumors of a cheaper iPhone started circulating more than two years before Apple finally launched the iPhone 5c. Now there's a new rumor, and when it materializes, it will have a bigger impact than the partnership with China Mobile or the iPhone 5c: the iWatch.

Rumors gathering pace
Speculation about the iWatch started gaining steam in early 2013, when both The New York Times and The Wall Street Journal reported that Apple is experimenting with iOS-based watches made of curved glass. The rumors became hotter when Bloomberg reportedthat Apple had hired several new wearable computing experts to work on such a device. With 2014 well under way, that team is believed to have grown to at least 200 people, according to MobiHealthNews' Brian Dolan.

The acquisition of Passif Semiconductor, a chipmaker developing radios for low-power Bluetooth, further fueled the story. Passif developed the low-power Bluetooth, or Bluetooth SMART, with embedded and wearable computing applications in mind, and the acquisition suggests that Apple is working robustly to bring out the iWatch as soon as possible.

Reports suggest that the iWatch may come with optical sensors to measure heart rate and oxygen levels, and will have various other medical applications. This speculation was fueled by the fact that Apple had recently published a job listing on its career site.

Apple hasn't confirmed the launch of the iWatch, but there are a number of sources indicating that it will happen within a year or two. Moreover, Tim Cook confirmed Apple's plan to launch products in "new categories" this year. Note that he used the term "categories," which indicates that Apple will be entering into at least two new markets. And at the moment, there are only two rumors -- the iWatch and a TV -- that are extensively talked about.

Why should investors care?
Investors tend to underestimate the potential of Apple's new categories. However, the iWatch has the potential to be a massive growth driver for Apple. Morgan Stanley projects that the iWatch will generate a whopping $17.5 billion in revenue in the first 12 months it's on the market. This is more than what the iPhone, at $2.5 billion, and the iPad, at $13 billion, generated in their first 12 months on the shelves, combined.


Morgan Stanley based this estimate on the fact that each new Apple product has sold faster than the product that came before it. The firm expects the iWatch to sell faster than the iPad, unless Apple suffers from supply constraints, which could bring revenue down to $12 billion. At first glance, the target may seem too high, but it is achievable and here's why.

High-margin sales
Everyone knows Apple loves the "High Price, High Margin" strategy. Morgan Stanley predicts that the iWatch will have a price tag of $299, which is $100 more than Sony's SmartWatch. However, since Apple has a very loyal user base, it can increase prices further without having any negative impact on the sales. Moreover, both Sony and Samsung have failed to impress gadget enthusiasts with their own versions of smart watches, and this gives Apple the opportunity to capture this market.

Sales of iPhones
The primary feature of a smart watch is that it integrates with your phone and is compatible with the operating system. So, it's certain that the iWatch will be compatible with the latest version of iOS, and sales of the iPhone will have a direct impact on sales of the iWatch. Apple nearly sold 34 million iPhones in the fourth quarter of 2013 and is constantly working to increase that number.

Analysts estimate that the deal with China Mobile will help Apple sell an additional 20 million phones in China, and the company is looking to sign on 50 new carriers for the iPhone, as per WSJ. These initiatives will drive up iPhone sales and will have a positive impact on iWatch sales when it hits the market.

The takeaway
The iWatch looks set to become Apple's next big product. The company has been criticized over its seeming lack of new, revolutionary products, but it looks set to break that image with an  iWatch. The market for smart watches is huge, and Apple is ready to attack this with its own version of the device. The company has historically done well with new launches and it won't come as a big surprise if it manages to do the same when it launches the so-called iWatch.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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