On Friday, April 10, Apple (AAPL +0.11%) finally began accepting pre-orders for the long-awaited Apple Watch. The initial supply of some models sold out in as little as 10 minutes.
Most Apple Watch models are now sold out through June or later. Source: Apple.
By the end of the day, there were no models left to ship for the first day of availability (April 24). In the U.S., a few models were quoted as shipping in 4-6 weeks, but most were backordered until June, or even later.
Many investors and analysts have been unsure of how to interpret the combination of a rapid sell-out online and short lines at most Apple Stores. Here's what seems to be going on.
No lines, no problem
One widespread observation by analysts and the media on Friday was the lack of long lines at Apple Stores across the world. Many seemed to be genuinely surprised that the lines were so short compared to the lines typically seen when a new iPhone launches.
However, people show up in droves at the Apple Store when a new iPhone goes on sale because it gives them an opportunity to be one of the first to buy Apple's latest and greatest product. For the most part, they don't show up just to touch a display model.
The scenario last week was completely different. Not only was the Apple Watch not available to purchase at the Apple Store on Friday -- you couldn't even pre-order one there. Apple retail chief Angela Ahrendts decided to take all pre-orders online for this product launch.
There weren't big lines at the Apple Store for the Apple Watch on Friday.
As a result, people who wanted to be among the first to get an Apple Watch had to pre-order their preferred models sight-unseen. Those who waited to try on an Apple Watch on Friday will have to wait weeks or months longer than those who ordered in the wee hours of the morning.
Apple is gauging demand
Apple Watch demand clearly exceeds initial supply -- but the magnitude of supply and demand is a hot topic of debate. Thus, analysts have provided a fairly wide range of estimates for how many Apple Watch pre-orders came in last weekend. Several put the total as low as 1 million, while others estimated that Apple could have taken 2.5 million or more pre-orders.
Whatever the exact numbers, many investors are wondering why Apple hasn't built enough watches. This has led to speculation about major supply chain bottlenecks.
Supply chain issues could definitely be part of the story. Every new device comes with its own manufacturing challenges, and a category-defining device like the Apple Watch is likely to have more than its share of complications.
That said, there's also another simple explanation. Apple may not have wanted to build up a big inventory of Apple Watches because it didn't know which models would be most popular.
There are 38 options for customers to choose from: four different case materials (aluminum, stainless steel, yellow gold, and rose gold), two sizes, and a wide variety of bands. If Apple tried to build up a big inventory before pre-orders began, it could get the mix wrong. For example, it might assemble lots of 42mm aluminum models only to discover that most customers preferred the 38mm stainless steel model.
Thus, it's possible Apple deliberately waited for the first pre-orders to come in before ramping up production in a big way. Now it has hard data on customer preferences. This will allow it to match future production of each model more closely to demand.
Ensuring a high-quality customer experience
There may be a second rationale for Apple's insufficient initial supply. The Apple Watch represents an entry into a completely new product category. It's really Apple's first new product launch since it became the global phenomenon it is today. (Apple had sold 30 million iPhones in the 12 months before the iPad went on sale -- whereas it sold nearly 75 million just last quarter.)
Apple products are far more ubiquitous today than they were even five years ago. Source: Apple.
Thus, Apple expected plenty of pent-up Apple Watch demand. Since all Apple Watch buyers will be entitled to personal set-up in-store, it wouldn't be ideal for millions of people to get their Apple Watches in the first week of availability. Apple Store employees would be overwhelmed by the number of set-up requests, causing the customer experience to suffer.
Similarly, with the Apple Watch being a completely new product, it's almost inevitable that some bugs will be discovered. With a limited supply available at launch, any such hiccups will affect a relatively small number of people. By the time Apple Watch clears its order backlog this summer, Apple will have had plenty of time to make any necessary software fixes.
The bottom line is that the Apple Watch roll-out seems to be proceeding smoothly so far. Neither the short lines at the Apple Store nor the long backlog for some Apple Watch models should be very concerning for investors. In fact, the "soft launch" should help Apple keep its early Apple Watch customers happy, which could be critical for the product's long-term success.
