Sales of traditional watches across the U.S. plunged to a seven-year low in June, according to research firm NPD Group. Revenue fell 11% annually to $375 million, while unit sales dropped 14%.
Did Apple's (NASDAQ:AAPL) launch of the Apple Watch in April cause that decline? It's hard to tell, due to Apple's refusal to share sales figures for the device, but let's discuss the numbers we know so far.
How many Apple Watches have been sold?
In late July, research firms Strategy Analytics and Canalys both reported that Apple had sold about 4 million Apple Watches worldwide. Slice Intelligence claimed that the Apple Watch had an average purchase price of $504, which means that Apple might have generated over $2 billion in Apple Watch sales within three months.
That number raised eyebrows, since Apple's "Other Products" division -- which includes Apple Watch, Apple TV, Beats Electronics, iPod, and other accessories -- only reported $2.64 billion in revenues last quarter. That was only a $952 million increase from the previous quarter. This means that either sales of Apple TV, Beats products, and the iPod plunged last quarter or sales and ASP estimates for the Apple Watch were too high.
According to Bloomberg's recent estimates, Apple likely sold about 1.9 million Apple Watches at an average price of $499, giving it an a more feasible quarterly revenue estimate of about $950 million. However, that still puts Apple on track to become the largest smartwatch maker in the world this year. Research firm Smartwatch Group estimates that only 6.8 million smartwatches (from 89 companies) were sold worldwide in 2014.
Which watchmakers will be affected?
The arrival of the Apple Watch encouraged more companies to release their own smartwatches, causing prices to drop across the board. According to Smartwatch Group, the ASP of smartwatches worldwide fell from $225 in 2013 to $189 last year. It's possible that figure could drop below $150 this year.
If that happens, makers of traditional watches within that price range -- like Fossil and Swatch Group's namesake brand -- could be in trouble. NPD reported that sales of watches between $100 to $150 already plunged 24% annually in June, making it the worst-performing price segment of watches between $50 and $999. However, NPD analyst Fred Levin told Bloomberg that sales of all sub-$1,000 watches could eventually be affected by the rise of smartwatches.
Apple is adopting the same premium brand strategy that it uses for iPhones. By selling Apple Watches for around $500 each, it avoids competing directly against cheaper Android Wear makers devouring each other in the low- to mid-range markets. Since Apple Watches only pair with iOS devices, it also complements its strategy of locking users within its digital ecosystem.
How are watchmakers responding?
Smartwatch sales definitely won't kill the traditional watch market anytime soon; 1.2 billion traditional watches were sold worldwide last year. IDC expects "smart wearable" shipments to hit just 26 million this year, mainly fueled by Apple Watch sales.
The pressure on the sub-$1,000 watch market also existed prior to the arrival of smartwatches. The low- to mid-range fashion watch market was commoditized years ago, and retailers have been marking down prices due to that saturation.
Nonetheless, top watchmakers are expanding to the smartwatch market to hitch a ride on its potential growth. Swatch, which also owns the Tissot and Omega brands, intends to launch a smartwatch with mobile payment capabilities later this year. LVMH's Tag Heuer and Fossil are both teaming up with Intel and Google to launch their own smartwatches as well.
The market is evolving
The Apple Watch might have taken a bite out of U.S. watch sales over the past few months. However, that decline was likely exacerbated by the use of smartphones instead of watches, rising sales of other time-tracking wearables, and the saturation of the overall market. NPD's U.S. watch estimates also don't include sales at boutique stores, supermarket chains, or online retailers.
Therefore, we shouldn't jump the gun and claim that Apple will "kill" the traditional watch market anytime soon. Instead, we should notice that Apple's entrance is pushing companies to connect their watches to their mobile devices and the cloud, which could increase the amount of data personal gathered across the Internet of Things.
Apple Watch sales probably won't account for more than a single-digit percentage of Apple's revenue for years to come, but they can expand its ecosystem with cloud-based services like Apple Pay, HealthKit, and HomeKit. Investors should watch how these services tether users to Apple's ecosystem via Apple Watch, instead of worrying about units sold or average selling prices.