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Cellular Connectivity Might Actually Be Driving Apple Watch Sales

By Evan Niu, CFA - Oct 19, 2017 at 11:20AM

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There's still a chance people won't use the connectivity as much as they think they will.

The headline feature of Apple's (AAPL -0.04%) Apple Watch Series 3 is cellular connectivity, which can be used to make phone calls from the device, stream music, and generally just makes Apple Watch more of an independent product that doesn't rely on the iPhone. I had my doubts about whether or not cellular connectivity would be enough to spur mainstream adoption, since there is a usability trade-off in terms of battery life, as well as the added cost of yet another data plan ($10 per month at all major U.S. carriers).

Well, it looks like adding cellular connectivity might have done the trick.

Man holding up Apple Watch Series 3 close to his mouth

Can you hear me now? Image source: Apple.

Survey says

GBH Insights analyst Daniel Ives is out with a recent research note (via CNBC) and believes that the Apple Watch Series 3 is enjoying "significant momentum" in retail sales, based on surveys conducted at Apple Stores. A whopping 70% of participating customers said they had never owned any previous generation Apple Watch -- Series 3 was their first time to adopt a smartwatch. That suggests that adding cellular connectivity really does appeal to mainstream consumers in what Ives calls a "game changer" for wearables.

Approximately 80% of respondents said they would choose to have a cellular connection, again underscoring that the feature may be resonating with consumers. Only the base Series 3 models made out of aluminum can be purchased without cellular connectivity (reducing the price by $70).

Key word: "Might"

As usual, it's worth pointing out that Apple still doesn't disclose financial results for Apple Watch, so investors won't really know how well Series 3 is actually selling. Management continues to use broad platitudes in describing how Apple Watch is performing. CEO Tim Cook said sales were up "over 50%" in the June quarter, while noting Apple Watch is the No. 1 selling smartwatch in the world "by a very wide margin."

Market researcher IDC estimates that Apple sold 3.4 million units in the second quarter, which is all investors have to work with for the time being.

Chart showing Apple Watch unit sales over time

Data source: IDC. Chart by author.

What if no one needs a cellular smartwatch?

The data point is encouraging, but there's something else to consider. The value proposition of having cellular connectivity on a smartwatch is still largely unproven. It's too early to say whether or not that connectivity will really contribute to usage, or how often the average consumer will need to make a phone call from their smartwatch when they don't have their smartphone with them.

There's a non-trivial chance that people end up using the feature less than they think they will, or that the usage doesn't justify the added costs over time ($120 per year!). If that proves to be the case, when upgrade time rolls around, those customers may not choose to add cellular to their next Apple Watch (if cellular is optional in future generations, that is). They might not even upgrade at all, unless Apple can figure out another compelling killer use case for smartwatches.

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