Apple (NASDAQ:AAPL) Watch, the first major new product category from the iPhone-maker since 2010, could sell tens of millions of units when it debuts early next year, generating billions of dollars in additional revenue, and emerging as a key growth area for the company.
But unfortunately, it may end what has been -- at least until now -- an incredibly impressive streak.
Faster than the one before it
Since the turn of the millenium, Apple's resurgence has been built on the success of three products -- the iPod, iPhone and, most recently, the iPad. Impressively, each product has sold faster than the one that preceded it.
In April, 2007, five and a half years after its sales debut, Apple announced that it had sold its 100 millionth iPod. Then, in March, 2011, it made the same announcement for the iPhone, less than four years after Apple's first smartphone went on sale. The iPad, despite widespread criticism when it was first unveiled in 2010, sold even faster than the iPhone, breaking the 100 million unit barrier in October, 2012 -- just two and a half years after it first arrived in stores.
Why Apple Watch could disappoint
Could Apple Watch keep the streak alive? It's certainly possible, but it will be difficult. In order for the Apple Watch to beat the iPad, it would have to sell 100 million units in less than 30 months.
Apple Watch faces a number of hurdles -- its design has been heavily criticized by watch industry veterans -- and there are still major unanswered questions that could limit demand. In particular, battery life -- Apple has remained mum on Apple Watch's battery capacity, and a report from Re/code suggested that Apple itself is unhappy with how long Apple Watch lasts away from its charger.
But these issues are hard to quantify, and may be overcome before Apple Watch launches, or by subsequent refreshes of the device that should debut long before the 30 month mark. Rather, the major limiting factor appears be intrinsic to Apple Watch's design -- its reliance on a tethered iPhone severely limits its addressable market.
How many watches could Apple sell?
Certainly, a handful of non-iPhone owners could buy the watch, perhaps as a novelty or for some fashion-related reason. But the overwhelming majority of watches Apple sells will likely be to iPhone owners -- in particular, iPhone owners who have purchased the device relatively recently (Apple Watch is only compatible with iPhone 5 and above).
Since the iPhone 5's debut, Apple has officially sold around 317 million iPhones (27 million in the iPhone 5's first quarter, 150 million in fiscal year 2013, 51 million in the 2013 holiday quarter, a combined 79 million in the two quarters reported this year, and 10 million iPhones sold in the iPhone 6's first weekend on sale). Not all of them, however, work with Apple Watch -- until the iPhone 6's debut, Apple was still selling the non-compatible iPhone 4S, and the iPhone 4 was offered for most of 2013. Unfortunately, Apple does not offer a sales breakdown by model, but earlier this year, analysts at Morgan Stanley estimated that the iPhone 4 and 4S made up around 40% of U.S. iPhones currently in use.
With the iPhone 6's debut, Apple's iPhone lineup is now entirely compatible with Apple Watch, and the next two crops of iPhones -- likely to be released in fall 2015 and 2016 -- should also, presumably, work with the gadget. Assuming steady annual sales growth near 15%, and an Apple Watch debut in January, Apple could sell around another 623 million Apple Watch-compatible iPhones over the device's first two-and-a-half years on the market (198 million in fiscal year 2015, 228 million in fiscal year 2016, and 197 million during the first nine months of fiscal year 2017).
Many of those iPhones will be upgrades from prior models, and though some will be resold or handed down, plenty of the older phones will be broken or simply tossed aside in the years ahead. Still, if 60% of the iPhones sold since the iPhone 5's debut are Apple Watch compatible, and 25% of all iPhones are lost for whatever reason, it seems realistic that Apple Watch could, by its 30th month on the market, have a potential user base of around 610 million.
Apple will need to do far better than Samsung
Assuming that figure proves accurate, if Apple Watch is to sell faster than the iPad, it will need an attach rate greater than 16%.
Apple's chief rival, Samsung (NASDAQOTH:SSNLF), hasn't been able to come close to that figure -- its own smartwatch, the original Galaxy Gear, shipped just 800,000 units in its first two months on the market. At the same time, the handset that its release coincided with -- the Note III -- sold 10 million units. Even if every one of those watches was sold to an end consumer (highly unlikely -- some reports suggested that as few as 50,000 had been sold through) the attach rate for Samsung's Galaxy Gear was, at most, 8%.
Samsung's displeasure with the Galaxy Gear has been evident in the firm's rapid iteration on the concept, with several other Gears being released over the last year. But Samsung has not offered much in the way of recent sales figures, suggesting that its attach rate has not meaningfully improved.
Of course, if the Apple Watch is a far superior product, it could sell in far greater numbers, making a 16% attach rate seem downright tame in retrospect. Other radical innovations -- like an Apple Watch that did not require the use of a paired iPhone -- would also certainly benefit the device's sales. Yet the odds do not appear to be in its favor. Apple Watch could sell faster than the iPad, and continue the trend, but I wouldn't count on it.