The first Apple (NASDAQ:AAPL) Watch will, according to Apple, require pairing with an iPhone in order to be fully functional. However, according to Cowen analyst Timothy Arcuri (via Barron's), that could be set to change with the next version of the Apple Watch. Indeed, according to Arcuri, the next-generation Apple Watch, which the analyst expects will launch later this year, won't require an iPhone for "full connectivity."
Will Apple Watch 2 will have cellular capabilities?
If Arcuri is saying what I think he's saying, then this would imply that the Apple Watch 2 will come with an integrated cellular modem. This would allow the device to connect to the Internet without needing to be tethered to an iPhone. However, this would create a number of challenges.
First, including a cellular modem would mean increased component costs, because the device would need to include a baseband, as well as a number of RF chips. That's a problem that can be solved by doing what the company does with the iPad: offer cellular and non-cellular versions.
The cellular version would be more expensive to make up for the increased component costs, as well as the royalty payments usually associated with the sale of devices with cellular capability. That said, inventory management in this case becomes even more difficult, particularly as Apple would need cellular/non-cellular versions of each of its three Apple Watch collections.
What about keeping customers locked in?
Another problem comes in the form of removing what could arguably be a key iPhone selling point. People who think that they just might want to buy an Apple Watch down the road, particularly if they're on the fence between an iPhone and a competitor's phone, go with the iPhone for the sake of the option to be able to get an Apple Watch.
Conversely, a customer who has an iPhone and an Apple Watch may be less likely to switch away from the iPhone to something else because that customer enjoys the Apple Watch so much. Requiring an iPhone to use the Apple Watch might actually be good for Apple's iPhone sales.
Will customers pay for another data line just to use the Apple Watch?
It's already tough enough to convince people to buy tablets with cellular capabilities, largely, I suspect, because paying a monthly data fee is off-putting. Perhaps those with deep enough pockets to buy the Apple Watch Edition might not really notice an extra monthly fee; but for the average customer, it probably doesn't make a whole lot of sense. In fact, given that the data usage required by something like an Apple Watch is relatively low, tethering to a phone might be the way to go for most customers.
One major downside that I see there is that overly aggressive data use on the Apple Watch could lead to high-power consumption for the cellular modem on the iPhone, potentially shortening the iPhone's battery life.
The other obvious downside, of course, is that, in order for the Apple Watch to be useful, one needs to carry around an iPhone, as well. Freeing it from dependence on the iPhone would make it more versatile.
One more thing
In addition to the comments that the next Apple Watch will have "full connectivity" independent of the iPhone, Arcuri claims that the next Apple Watch will come this year. Given that the first Apple Watch won't be for sale until late April, it seems difficult to believe that Apple would make its brand new product obsolete in less than a year.