Why Apple’s iWatch Will Crush the Cheaper Competition

Apple (AAPL -1.22%) recently hired Patrick Pruniaux, VP of Sales and Retail for LVMH's high-end TAG Heuer Swiss watches. Pruniaux is Apple's third major hire from a luxury retailer over the past year. Last July, Apple hired Yves Saint Laurent CEO Paul Deneve as a vice president. Last October, it hired Burberry CEO Angela Ahrendts as its retail chief.

Source: Wikimedia Commons.

The hiring of this "luxury triumvirate" strongly suggests that Apple's iWatch -- currently rumored to be on track for an October launch -- could be far more expensive than current smartwatches. While it may seem risky to launch a high-end smartwatch into a sea of cheaper ones, it's actually a solid approach that could make the iWatch every bit as disruptive as the iPod, iPhone, or iPad.

The business of luxury
Apple has traditionally ignored the low-end market due to its lower margins. Steve Jobs famously compared Apple to BMW and Mercedes to illustrate the point that margins and reputation matter more than market share.

Apple's aim has always been to dominate the high-end market. The iPhone 5s costs $649 to $849 without a contract. Its only real competitor in that price range is Samsung's (NASDAQOTH: SSNLF) Galaxy S5. Yet Apple still comfortably dominates the U.S. smartphone market with a 42% market share compared to Samsung's 27%, according to comScore mobiLens.

That's why launching the iPhone 5c was a mistake. The colorful plastic 5c was only slightly cheaper than the 5s at $549 to $649, but it was doomed by its reputation as the "poor man's iPhone." The problem is that Apple listened to Wall Street analysts, who were convinced that Apple needed a low-end device to compete against cheaper Android devices, instead of following its instinct to maintain the "BMW and Mercedes" path that Jobs had set the company on. The 5c wasn't a complete bomb, but it was a pointless device that cannibalized 5s sales instead of converting Android users.

Let's not do that again. Source: Apple.

According to research firm Forrester, iPhone users in the U.S. have an average household income of $105,200, compared to an average household income of $89,300 for Android users. The same trend can be seen in Mac sales -- the average household income of Mac owners is $98,560, compared to $74,452 for PC owners.

Considering how well Apple's market share has held up, its popularity among affluent customers, and the lackluster reception of the 5c, it makes sense to launch the iWatch at a higher price than the $150 to $300 price of Samsung's Galaxy Gear watches.

The business of delayed disruption
Yet pricing is only half of the big picture. Customers aren't simply going to line up to buy a more expensive smartwatch that is inferior to the other ones on the market.

Apple didn't invent the MP3 player, smartphone, or tablet, but it disrupted all three markets. The reason is that Apple took its time and studied its competitors' weaknesses. With the iPod, Apple addressed the issue of limited storage for MP3s. With the iPhone, Apple removed the cramped smartphone keyboard and introduced a touchscreen-based mobile OS. With the iPad, Apple reinvented the tablet as a larger version of a smartphone, rather than a smaller version of a laptop.

Before and after Apple. Source: Wikimedia Commons and company websites.

These three examples demonstrate what Apple did the best. Instead of following the market, it fixed the flaws in existing devices and launched better ones. That's where the smartwatch industry is today -- companies are all scrambling to launch rushed devices to stake their claim in the wearables market.

That chaos means that Apple, once again, has a real opportunity to disrupt the market and crush the competition with a delayed but superior product.

Why the iWatch will be superior
There are three key problems with current generation smartwatches -- appearance, battery life, and usefulness. With so many high fashion executives on board, Apple likely will launch a sleeker device than the boxy Samsung Galaxy Gear or Sony SmartWatch. Meanwhile, Apple's recent acquisitions and hires indicate that it could also solve the second and third problems.

In May, Apple acquired LuxVue, a power-efficient LED company, which suggests that the iWatch could last longer on a single charge than current smartphones. Apple has also hired top designers from Nike's FuelBand division and other medical device companies, indicating that its watch could include plenty of biometric sensors.

That data will naturally be compatible with Apple's HealthKit platform, which will combine data from compatible fitness apps and wearable devices into a single iOS 8 dashboard known as Health. Health is connected to Epic Systems, a major electronic health records (EHR) company that covers over half of all patients in the U.S.

EHR connectivity, which can directly provide health data to doctors, could make the iWatch a more useful health monitor than current smartwatches, which lack that level of doctor-patient connectivity.

The Foolish takeaway
Despite these clear strengths, Apple will face fierce competition when it launches its iWatch.

Google (GOOG -1.10%) (GOOGL -1.23%) intends to flood the market with cheap Android smartwatches with Android Wear, a streamlined version of Android specifically designed for smartwatches. Samsung recently launched Simband, a modular wearable device that allows third-party companies to make custom devices with swappable health sensors. Microsoft (MSFT -1.27%) is also reportedly working on a new wearable device that will be compatible with Android, iOS, and Windows Phone devices.

However, there's plenty of room for all of these companies to coexist. Research firm ON World forecasts that the number of smartwatch shipments will soar from fewer than 4 million in 2013 to 330 million by 2018.

Apple just needs to concentrate on capturing the high end of the market with the iWatch, which could be much sleeker, pricier, and more feature-rich than customers imagine.