Why I'm Skeptical About the Apple iWatch

The expectations around the iWatch may be far too lofty.

Ashraf Eassa
Ashraf Eassa
Jul 20, 2014 at 12:00PM
Technology and Telecom

Though the world seems to be expecting that Apple's (NASDAQ:AAPL) allegedly upcoming smart watch (dubbed by some as the iWatch) will be a game changer, there's a real chance that the iWatch won't do as well as many seem to expect.

Smartwatches are the latest attempt at the "next big thing"
Ever since the launch of the iPhone in 2007 and then the iPad in 2010, the investment community has been anxiously awaiting the next big thing from Apple as the smartphone and tablet markets mature. 

Now, the argument is that cell phones were just cheap, uninteresting commodities before the iPhone, so Apple can similarly transform the watch market. But it's important to note that Apple's gigantic smartphone profits have, in no small part, been due to a very innovative carrier subsidy model that brought what would otherwise be rather expensive, inaccessible devices to the masses. 

The iWatch would not only need to be a fundamentally game-changing device in terms of the usage model (similar to the iPad or iPhone), but it would need to be accessible at a low enough price so as to drive meaningful volumes and fairly rapid upgrade cycles (the iPad didn't have this, so it couldn't replicate the iPhone's financial success). That's not to say that a company like Apple can't achieve a meaningful financial uplift from the introduction of a smartwatch, but it's not going to be easy. 

The expectations seem to be going ballistic
One important factor that could lead to a perceived "disaster" for the iWatch is that there are a number of analysts putting out some pretty optimistic numbers for sales of this still-fictional device. For example, Morgan Stanley's Katy Huberty seems to think that Apple could sell between 30 and 60 million of these devices at an average selling price of $300 in the first year of availability. 

Driving home this point, Seeking Alpha contributor Paulo Santos recently made a very nice argument illustrating just why even if Apple's iWatch is a smash success, it still might not be a large driver of Apple's revenues/profits.

Moreover, Santos notes that Swatch Group (NASDAQOTH:SWGAY), the leading vendor of watches, generates only $9.86 billion in annual sales across a wide spectrum of watch offerings from the low end to the very high end. Is Apple likely to surpass Swatch Group's entire revenue base in just the first year of availability of the iWatch? It's possible, but this seems very optimistic. 

Foolish bottom line
Only time will tell whether the iWatch -- if it's even real -- will be a commercial success. The real question isn't so much about how well the iWatch does as whether the demand will ultimately keep up with some of the expectations floating around the investment community.

Even if the iWatch is successful in defining a fundamentally useful new product category, it's not at all clear that long-term demand profile for this product category will approach that of the iPad, let alone the iPhone. In that sense, the iWatch seems to be destined for disaster, even if it ultimately ends up being yet another nicely profitable product category for Apple.