Apple (NASDAQ:AAPL) co-founder Steve Wozniak recently criticized the Apple Watch during an "Ask Me Anything" session on the popular social news site Reddit. "I love my Apple Watch," wrote Woz, "but it's taken us into a jewelry market, where you're going to buy a watch between $500 or $1,100 based on how important you think you are as a person."
He also noted that "the only difference is the band in all those watches," and that its tiered pricing strategy did not represent "the company that Apple was originally, or the company that really changed the world a lot."
Although that critique sounded harsh, Woz still praised CEO Tim Cook's leadership, stating that he was "continuing a strong tradition that Steve Jobs was known for -- of making good products that help people do things they want to do in their life." But is Wozniak right about Apple turning into a complacent luxury goods maker which focuses more on premium appeal than true innovation?
The luxury goods strategy
Under Cook, Apple has clearly embraced the idea of the company as a luxury retailer. In 2013, the company hired Burberry CEO Angela Ahrendts as its retail chief and brought in Yves Saint Laurent CEO Paul Deneve as its special projects VP. The following year, Apple hired TAG Heuer retail VP Patrick Pruniaux as a special projects director.
All three market veterans helped launch the Apple Watch as a luxury timepiece, split into low-end, mid-range, and high-end tiers. Apple nurtured that "snob appeal" by asking customers to schedule "fittings" in advance, selling gold versions of the watch that cost over $10,000, and providing VIP fitting rooms for those top-tier customers. Those pretentious strategies were ripped directly from Burberry's playbook for VIP customers, but they nonetheless bolstered Apple's reputation as a true luxury brand.
The luxury strategy pays off
Many critics panned the Apple Watch's design, functionality, and price when it launched last April. Yet the Apple Watch reportedly accounted for 52% of all worldwide smartwatch shipments last year, according to Juniper Research. Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android Wear only accounted for 10% of all shipments, although Android runs on the majority of smartphones worldwide.
The key difference between Apple and Google's smartwatch strategies is that Apple makes both the hardware and software, while Google depends on other hardware makers to do the heavy lifting. The problem was that none of those hardware makers -- like Lenovo's Motorola, Huawei, or Asus -- had the brand appeal to sell a watch that cost over $200. Android users also have a reputation of being more frugal with both handset and app purchases -- hardly an ideal customer base for pricey smartwatch offerings.
IDC estimates that Apple sold 13 million Apple Watches last year -- an impressive number but far less than the 21 million the firm originally forecast. At an average price of $500, that would equal just 3% of Apple's 2015 revenue. IDC believes that Apple will ship 45 million Apple Watches annually by 2019, which would considerably increase the device's share of the top line.
Is Apple losing its innovative edge?
Under Cook, Apple has arguably become more of a follower than an innovator. Steve Jobs' Apple disrupted the MP3 player, smartphone, and tablet markets with truly innovative designs that streamlined user interfaces with click wheels and touchscreens. Tim Cook's Apple has been focused on changing screen sizes, colors, and expanding the company's moat as a luxury retailer. The Apple Watch also failed to turn the concept of smartwatch design upside down the same way the iPod, iPhone, or iPad did.
Therefore, Wozniak is certainly right about Apple not being "the company it was originally." Yet investors shouldn't forget that Jobs famously compared Apple to BMW and Mercedes while noting that margins and brand reputation matter more than market share. We'll never know if Jobs would have turned Apple into a full-blown luxury retailer, but that statement suggests that he might have approved of Cook's strategy.
Should investors worry about the Apple Watch?
Apple recently slashed the price of the entry-level Apple Watch by $50, which fueled speculation that sales were slowing down. A spokesman from Samsung, Apple's most significant rival in this space, also told Computerworld during CES 2016 that demand for smartwatches had been weaker than anticipated.
But on the bright side, Apple remains the dominant smartwatch maker, which has sent traditional watchmakers scrambling to create comparable connected timepieces. High-end challengers like the Huawei Watch and LG's Watch Urbane, which are both compatible with iPhones, still don't seem to be hurting Apple Watch sales.
For now, investors shouldn't worry, since it probably won't become a major pillar of growth in the near future. Instead, investors should focus on falling sales of iPads and slowing sales of iPhones -- which could both cause Apple's growth to grind to a halt later this year.