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Apple Watch = Health and Fitness; Apple's Shifting Strategy; Beyond the iPhone, Continued

 

Thursday, September 15, 2016 – blog post / forum thread

Good morning,

Happy Moon Festival! It has been a Facebook and Apple-heavy week; just one more update on last week's event today — this time wearables — and we should have a more normal spectrum of topics next week. Once I recover from all of the BBQ I'm going to eat as soon as I finish this, of course.

On to the update:

Apple Watch = Health and Fitness

John Gruber had a really great Watch review where he discussed the three tentpoles Tim Cook used to introduce the Watch two years ago:

  1. The most advanced timepiece ever created
  2. A revolutionary new way to connect with others
  3. A comprehensive health and fitness companion

As Gruber notes, while the idea of three tentpole features echoed the iPhone introduction, Apple was wrong about 1.5 of the features:

There’s a difference between the iPhone as a phone and the Apple Watch as a watch. The iPhone really was a revolutionary mobile phone. Visual voicemail, easy conference calling — the iPhone put a well-designed interface on features that other cell phones did not have. But as a watch, the Apple Watch had serious flaws. It was perfectly accurate at keeping time, but because the screen wasn’t always on, it was worse for glancing at to check the time. As a long-time wristwatch wearer, I still prefer a mechanical watch for glancing at the time. Cook’s phrasing oversold the Apple Watch as a watch.

The Apple Watch’s other two debut tentpole features make for an interesting contrast. “A comprehensive health and fitness companion” could not be more spot-on, describing what makes Apple Watch a compelling product. “A revolutionary new way to connect with others” could not have been more wrong.

It's difficult to overstate the degree to which Apple doubled-down on health and fitness when it came to last week's event. For example, there were 47 separate "shots" in the Series 2 introductory video; only 12 of them were non-fitness related (and that includes counting pedestrian shots as "non-fitness"). The rest were all explicitly athletic: swimming had the most shots, but there was also tennis, stretching, basketball, soccer, jump rope, road biking, skateboarding, mountain biking, and, of course, running. The message — reinforced by Williams' presentation and the Nike partnership — was clear: the Apple Watch is a fitness device.

Obviously this is a big deal for a company like Fitbit; if you didn't believe me that the two companies were competitors last week surely you must now! In fact, while Cook bragged that Apple was the 2nd largest watchmaker by revenue in 2015, which means revenue between first place Rolex's $4.7 billion and third place Fossil's $3.2 billion, the presumed falloff in Watch sales this year (at least until the Series 2 launch) likely means that Fitbit's $1.1 revenue in the first two quarters is at least in the same ballpark as Apple Watch, despite the fact their products' average selling price is much lower (as an aside, now that the various Apple models are priced similarly, the "competitive advantage" justification for not releasing Watch revenue is gone; fingers crossed we start getting real numbers from Apple going forward…but I'm not counting on it).

Apple's Shifting Strategy

To that end, in what was perhaps the most important signal in the Watch presentation, Apple upgraded the original Apple Watch with the faster S2 package-on-a-chip and lowered the price to $269. It should be noted that given the economics of chip production (chips themselves have basically zero marginal cost; all of the cost is fixed design and tooling expenses), it is very likely about the same cost for Apple to manufacture only the S2 instead of both the S2 and the S1. And it's certainly possible that Apple simply wanted to increase the baseline processor sooner rather than later. I bet both of these things are true. But what I think is also true is that we now have the definitive answer to the question around the Watch: strategically Apple now thinks of the Apple Watch like it thought about iPods, even if it launched with the expectation of being an iPhone.

Understanding how Apple thought about the iPhone and iPod differently was one of the earliest lessons I learned while writing Stratechery (which is another way of saying it was one of my earliest mistakes!). Start with the iPod: as I documented pre-Stratechery Apple was very aggressive with iPod positioning and pricing.

Price 2

I originally presumed that iPhone prices would, in the long run, follow the same pattern; that's why I managed to perfectly describe why the iPhone 5C would be $550 and then predict a price $100 less (oops!). However, as I wrote after the iPhone 5C unveiling, in one of the most focused presentations Tim Cook's Apple has given, the company made clear that they were staying high-end:

This attitude and emphasis on higher-order differentiation – the experience of using an iPhone – dominated the entire keynote and the presentation of features, with particularly emphasis throughout on the interplay between software and hardware…

That assuredness and self-confidence was on full display in this presentation. This was Apple, confidently, and without a glimmer of doubt, declaring that the iPhone is special, that it’s worth paying for, and that people all over the world will do just that.

It certainly seems that Apple was hoping to follow a similar strategy with the Watch: yes, it was going to be a lot more expensive than fitness trackers like those made by Fitbit, but it was going to do so much more; in the long run, just as the iPhone obsoleted single-use phones and cameras and even the iPod, a Watch that did it all would obsolete the entire Fitness category, giving Apple license to charge its usual high-end prices with its comfortably high margins.

Now, though, there is a new strategy signified both by the presentation and especially by that 27% cheaper yet fully capable Series 1: just as the iPod dominated the music player market not only in terms of profit but also units, Apple hopes to dominate the health and fitness market with the Watch, even if that means a business that is more of an accessory than a replacement for the iPhone, and all the reduction in average selling price that entails. Indeed, I wouldn't be surprised if the Series 1 gets even cheaper next year — or maybe even sooner, via retailer discounts — and I'd say there is a non-zero possibility Apple introduces a pure health-and-fitness device below the Series 1 (although I think this is unlikely).

As for Fitbit, Apple's focus is both good news and bad news: on the good news side, if the decision is about the best fitness tracker than Fitbit has two very real advantages in price and battery life (and they work with Android). Apple itself is deemphasizing the parts of the Watch that Fitbit can't match. Unfortunately for Fitbit, Apple's pricing move suggests that cushion may not last as long as they had hoped, and while an Apple Watch will likely never get five days of battery life, all that other stuff that is for now a distraction still holds the potential to be so much more as Apple brings both developers (Hello Pokémon Go!) and Moore's Law to bear.

Beyond the iPhone, Continued

To be sure, Apple's new strategy is a huge improvement, if for no other reason than, unlike the original, it is actually articulable. True, there may be a short-run cost in potential customers and developers who may be interested in the Watch for non-fitness reasons not even bothering to consider it, but the essence of strategy is making choices, and it is a positive sign that Apple has done so (this is a mistake I made in my original Watch analysis as well).

Moreover, it's not like Apple is foreclosing the future: remember, iPods laid the groundwork for the iPhone, and the Watch has and will continue to lay the groundwork for a world beyond the iPhone. Indeed, it seems certain that work that went into developing the various technologies needed for the Watch, from miniaturization to bluetooth enhancements to chip design, contributed to the AirPods.

Note that when I wrote Beyond the iPhone the Watch played a critical role:

What happens if we presume that the same sort of advancement that led from Touch ID to Apple Pay will apply to the AirPods? Remember, one of the devices that pairs with AirPods is the Apple Watch, which received its own update, including GPS. The GPS addition was part of a heavy focus on health-and-fitness, but it is also another step down the road towards a Watch that has its own cellular connection, and when that future arrives the iPhone will quite suddenly shift from indispensable to optional. Simply strap on your Watch, put in your AirPods, and, thanks to Siri, you have everything you need.

This seems so clearly to be the future for Apple: a Watch that does not replace the iPhone, but enhances it with body-sensing and notification capabilities; AirPods that do not replace the iPhone, but enhance it with an always available voice assistant. In a year or two there will probably be an augmented reality product, still with the iPhone as the center. And then one day, perhaps without anyone really noticing, the shift will happen: just as the Mac went from hub to just another device, the iPhone may do the same as all of Apple's wearables replace its functionality not individually but collectively.

The Watch's original sin was trying to pull that future forward way too soon, and for trying to do it alone; Apple didn't build the iPhone as a digital hub, they started with the iPod and ended up here. When and if the Watch reaches its full potential it will follow the same sort of path from focused product to obsoleting supercomputer — or at least one piece of it.

Time for BBQ.


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