Apple’s iWatch: The Missing Half of Its Health Care Puzzle

Apple (NASDAQ: AAPL  ) recently revealed its health-care plans at WWDC 2014 with its iOS 8 Health app, a unifying dashboard for compatible fitness bands, medical devices, and fitness apps.

However, Apple didn't answer the question on everyone's mind -- whether or not the tech giant would launch a companion smartwatch to face off against Samsung (NASDAQOTH: SSNLF  ) , Sony, and other competitors.

Source: Wikimedia Commons.

Fancier, sleeker, and pricier
The known pieces of the puzzle indicate that Apple's "iWatch" could be fancier, sleeker, and pricier than other smart watches and fitness bands on the market.

Apple notably hired Saint Laurent CEO Paul Deneve as a vice president, and Burberry CEO Angela Ahrendts as retail chief, indicating that the iWatch could be a high-end product. Meanwhile, Apple's recent acquisition of LuxVue, a power-efficient LED company, suggests that the iWatch could be slimmer and last longer between charges than existing devices. Apple also just filed a patent for a shoe-based sensor and a body-bar sensing system, indicating that the iWatch could wirelessly connect to shoes and free weights.

Although Apple has yet to formally announce the iWatch, analysts have already started to map out sales expectations for the rumored device. UBS analyst Steven Milunovich believes that the iWatch will launch at $300 this October, going on to sell 21 million units in 2015 and 36 million in 2016. By comparison, Apple sold 150 million iPhones, 71 million iPads, and 26 million iPods in fiscal 2013. 

But investors should consider two critical questions first: Would it make sense for Apple to release a smartwatch in 2014, and what kind of impact would it have on the fitness-band market?

Why Nike matters
If Nike (NYSE: NKE  ) is involved with the production of Apple's iWatch, then it could indeed be a game-changing personal fitness device.

Nike's relationship with Apple started in 2006 with the Nike+iPod kit, which consisted of a sensor in the shoe which transmitted workout data to an iPod. In 2008, it upgraded the system to work with the smaller iPod Nano and a wristband. Later that year, Apple and Nike released Nike+iPod for the Gym, which connected iPods to compatible fitness equipment. Apple eventually added built-in Nike connectivity to iOS with the release of the first iPhone and iPod Touch, eliminating the need for external dongles.

Last year, Apple hired several of Nike's top designers for the FuelBand. In April, Nike reportedly laid off 70% to 80% of its FuelBand team, indicating that it was ready to halt production of the popular fitness band. The FuelBand, which has always been an iOS exclusive, controlled 10% of the fitness band market at the end of 2013, according to NPD Group, trailing the Fitbit Flex (68%) and Jawbone UP (19%).

Nike's FuelBand. Source: Nike.

Considering how Nike has struggled on its own against Fitbit and Jawbone, it makes strategic sense to permanently team up with Apple to eliminate all redundancies. Apple's recent patents for a "shoe sensor" and "body bar sensor" suggest that Apple plans to combine the past features of the Nike+iPod alliance and the FuelBand into a single device, which wirelessly communicates with Nike shoes and fitness equipment.

Apple always leapfrogs the competition
Apple's "delayed leapfrog" strategy has served it well in the past. The iPod wasn't the first MP3 player, the iPhone wasn't the first smartphone, and the iPad certainly wasn't the first tablet computer. However, all three products disrupted their respective markets because they offered superior experiences for the consumer.

This is the reason Apple hasn't announced its iWatch yet. It's biding its time, and studying the weaknesses of competing products to avoid making the same mistakes.

Samsung's Galaxy Gear watches are frequently criticized for their dependence on Galaxy phones, high price tags, mediocre battery life, and lackluster selection of apps. Other recent smartwatches from Sony, Acer, and Lenovo's Motorola Mobility are also considered ambitious, but imperfect. That's probably why Samsung went back to the drawing board, and recently released a modular reference design, Simband, for third-party manufacturers to experiment with.

If Apple addresses all those drawbacks with a sleek, high-end device that can communicate with iPhones, shoes, and gym equipment, it could turn the market upside down, just as it did with MP3 players, smartphones, and tablets.

The Foolish takeaway
In conclusion, Apple has revealed half of its intentions for the personal fitness space with software. However, investors will now have to see if the other half can tie into its hardware business with a wearable device to complement the iPhone and iPad, which together accounted for 74% of the company's revenue last quarter.

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