At Apple's (NASDAQ: AAPL) product event yesterday, the company focused primarily on just two products: the iPhone 7 and the Apple Watch Series 2. While the iPhone was the clear headliner, the opening act was notable in what was missing. The new Series 2 of the Apple Watch Edition now features a white ceramic case, while the original gold case is no more.
The shift from gold to ceramic is telling, as it suggests that Apple's efforts to sell smartwatches that cost $10,000 (or more) have been relatively unsuccessful. The new ceramic model starts at $1,249 -- about the price of a new Mac -- and Apple says it is four times as hard as stainless steel. That's a pretty big change in pricing strategy. Presumably, the market for $10,000 smartwatches that become technologically outdated in short order is pretty small.
Originally, I thought the high price point of the Edition would offset low unit volumes, not that Apple has ever shared detailed financial results around its nascent smartwatch business. The most obvious impact is that average selling prices will decline, but Apple will also modestly reduce its exposure to the volatile price of gold. Incidentally, Apple recovered approximately $40 million worth of gold through its recycling program last year.
You can think of the original gold Edition as an experiment, testing the waters of high fashion. It took quite a bit of courage even to try such an ambitious pricing strategy, and no other original equipment manufacturer attempted to go quite as high.
The move to ceramic will probably be well received, as it rationalizes the product line in a compelling way, particularly as Series 2 includes various other performance improvements. But that was always the rub. People know that tech gadgets depreciate quickly as performance gets better with new versions, and $10,000 is a lot to ask for a product that you know will suffer such a fate.
Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple.
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