Apple Watch Hero

Image source: Apple.

I recently acknowledged that I was wrong about Apple's (NASDAQ:AAPL) iPad. I'd predicted that the iPad could become the company's primary revenue driver. After the first couple of years of blistering adoption, iPad unit sales have sagged as the market searches for an appropriate upgrade cycle length.

Looking back, this makes sense. After early adopters rushed out to buy Apple's tablet, they were getting on a third upgrade track, and now need quite compelling reasons to go out and upgrade to the latest and greatest. With Apple now entering a fourth product category with Apple Watch, are there any lessons from the iPad that investors should use to set their expectations?

To upgrade or not to upgrade, that is the question
I think it's safe to say that if the average consumer were to list their upgrade priorities right now, it would likely look something like this:

  1. Smartphone
  2. Computer/laptop
  3. Tablet

We use our smartphones constantly, and smartphone OEMs continue to offer compelling performance gains each year to warrant upgrading frequently. The typical upgrade cycle used to be two years, but carriers are now introducing a slew of new ways to upgrade even more frequently. The average smartphone upgrade cycle is now expected to contract to less than two years.

Computers are still the primary productivity form factor for most people. Performance gains are modest nowadays since this is such a mature category, and this is the most expensive of the three categories listed, so people usually upgrade their computers every five years or so.

For consumers to upgrade their tablets, they need a good reason to (in terms of new features or better performance) and it has to fit within discretionary income budgets. Discretionary income is limited, so there is an inherent trade-off with upgrading a tablet since that money could be put toward a higher-priority smartphone upgrade, for example. It seems that for whatever reason, most people that have bought tablets aren't upgrading them yet or all that often.

Back to Apple Watch
So what happens when you introduce a fourth category to the mix? Where does a smartwatch fit in terms of upgrade priority?

When Steve Jobs introduced the first iPad in 2010, he said that any new product category has to perform certain tasks better than existing product categories. "The bar is pretty high," he added, while naming a few examples of the types of tasks a tablet is better at. This list includes browsing the Web; emailing; sharing and viewing photos and videos; listening to music; playing games; and reading e-books. Otherwise, the new product has no reason to exist.

Using this framework, the inevitable question is: What does Apple Watch do better? For starters, it is the only fitness tracker that can effectively track and monitor health data using sensors. Of course, it also tells time more conveniently than any other category since it is a watch, after all. These are unique characteristics of the wearables category, though. Beyond that, I don't believe Apple Watch performs other tasks -- such as emailing, texting, or viewing photos -- better than existing categories.

For these reasons, I believe that the Apple Watch will likely come in at the very bottom of the list:

  1. Smartphone
  2. Computer/laptop
  3. Tablet
  4. Smartwatch

I do expect that Apple will make dramatic improvements in performance in the first years, like any nascent product. The forthcoming generations should offer much greater processing power, battery life, and more stuffed into ever thinner and lighter designs.

Right now, the smartwatch market is still very much in the adoption phase. But eventually, as the market matures, sales will transition to upgrades. Your guess is as good as mine when it comes to how long the smartwatch upgrade cycle will be, but I think it might be quite lengthy. That's especially true if you spent $10,000 on an Edition model. Who wants to upgrade that every year?

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends 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.