Apple's (NASDAQ:AAPL) long-awaited entry into the smartwatch market is almost here. The iDevice maker's strategy, offering watches with price points ranging from $350 to $17,000, is an attempt to appeal both to everyday users of Apple products and to those who routinely spend thousands of dollars on luxury items.
The success of the cheaper versions of the watch will ultimately depend on how useful the device is, as well as the cult-like strength of Apple's brand. Meanwhile, the very high-end versions are unlikely to move the needle for Apple, and could actually be an unmitigated disaster for the company. Here's why.
This isn't how the luxury market works
Every Apple Watch, whether it costs $350 or $10,000, provides the exact same functionality. The innards are identical, and spending 30 times more than for the cheapest model gets the user exactly zero added features.
The only differences between the models are the materials used to construct the watch and the band. The cheapest Sport models use aluminum, the mid-range models use stainless steel, and the high-end models use 18-karat gold (yellow gold or rose gold). Depending on the band chosen, the price of the gold version goes as high as $17,000.
So Apple is trying to sell a $350 watch along with a couple of ounces of gold for $10,000. For the same reason a $20,000 Rolex isn't just a Timex with some fancy materials thrown in, or that a Ferrari isn't just the innards of a Toyota Corolla crammed into a cool-looking shell, Apple's gold watch doesn't make much sense.
For a luxury item to be a status symbol, there can't be nearly identical versions that sell for prices that nearly anyone can afford. That's why the cheapest Rolex still costs thousands of dollars. If Rolex started selling $350 watches, the brand's prestige would implode.
Apple has a strong brand in the tech world, but it is completely untested in the realm of high-end luxury goods. Its smartwatch strategy makes little sense, and I think the company is suffering from a bit of hubris.
A recent Wall Street Journal article suggested Apple expects to produce over 1 million gold watches per month by the second quarter of this year. Fellow Fool Adam Levine-Weinberg pointed out that this number is grossly unrealistic, since it would indicate Apple would generate at least $120 billion annually from just the high-end version of the watch.
But even 1 million gold watches per year is likely to be overly optimistic. While the cheaper Apple watches are tech products, capable of creating an entirely new market, the gold watches really aren't -- no one in their right mind would choose the gold watch simply for the functionality, which is identical to the cheaper versions. Most of the revenue Apple generates from these high-end watches is likely to be taken from entrenched luxury-watch makers. The entire Swiss watch industry generated about $21.5 billion in sales last year, with Rolex producing $4.5 billion of that total. Sales of 1 million gold Apple watches per year would represent roughly half of the entire Swiss watch market.
You could argue the Apple Watch could expand the market for luxury watches, but only so many people on this planet are willing to shell out $10,000 or more on a watch. In the United States and China combined, there are about 9.5 million millionaires, and only a fraction of them are likely interested in a $10,000 gadget from Apple.
One Piper Jaffray analyst estimated Rolex sells about 750,000 watches per year at most, making Apple selling 1 million $10,000 watches annually seem far-fetched. The same analyst predicted just 10,000 Apple gold watches would be sold per year, resulting in roughly $100 million in revenue. That seems much more realistic.
Apple's high-end gold watches are unlikely to generate enough revenue to have a meaningful impact on the company's top line. Whether the cheaper models will sell well is another question entirely, and that debate will likely rage on until the watches are finally released. But Apple's foray into the luxury market will face some serious roadblocks, and I doubt it will succeed.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.