When Apple Inc (NASDAQ:AAPL)’s Apple Watch was announced last week on September 9th, the price of Apple’s shares sudden dropped after having been steadily bided higher and higher to a record $102.74. And the stock kept dropping for the rest of the day.
But whatever negative effect that the disappointment of the Apple Watch had on investors wasn’t permanent. Two days after the announcement event, Apple’s stock price bounced right back up to just under the high of September 9th. Investors are beginning to warm up to the Apple Watch. Good thing they are too, because the potential value of the Watch will be incredible.
Watch-Like
The main that that surprised many investors and fans of Apple about the Watch was just how much the device resembled an actual watch. Many investors had described their predictions as something that would be a little more edgier and less traditional. Instead, we saw what was essentially an enhanced Tank Watch.
For me, the new Galaxy Gear S from Samsung (OTC:SSNLF) that was unveiled at IFA last week was more like what I had imagined the Apple Watch to look like. The Samsung Gear S Watch has a diagonal curved AMOLED display that measures two inches and wraps around the wrist.
Rather than present an edgy watch, Apple presented us with a modest diagonal display that measures 1.5 inches, which is not big enough for pinch gestures, which forces Apple to use a mechanical wheel for zooming in and out. After seeing the screen of the Apple Watch, there was much doubt raised regarding Apple’s prospects about taking over the feature watch industry. With the large touch screen of the iPhone 6 and the iPhone 6 Plus, Apple had given customers a better alternative to the smartphones that put the feature on buttons. It seems like Apple did not have the same plan in mind for the Watch.
But why would Apple do this? The smaller display screen does not do much to reduce the bulkiness of the Apple Watch. The screen takes up only roughly 70 percent of the width of the body of the Watch, making the Watch a bulky device that takes up much space on the wrist like most smart watches do. One possible reason could be that Apple just did not want to rely on Samsung for its Watch displays. Samsung is responsible for introducing and making the active matrix organic LED technology used in the Watch, and uses it in its televisions as well. Obviously, Samsung would have been completely fine with making the display screen of the Gear S available to Apple, which would increase the South Korean company’s production volume and thus lower its cost per unit.
Most likely the reason for the smaller screen is due to battery life. However there is no doubt that AMOLED is the future in display technology and that it is best suited for displays for smart watches. AMOLED display screens offer a higher contrast and better visibility in bright light. They are also lighter and thinner than LCD display screens. These screens do not need a back light, and only the pixels that are lit up use up power. These features seem to be just what Apple needs with its Apple Watch.
Features
Apple has done much to deal with the small screen of the Watch and offering a touch display that gives great functionality as well as the scroll wheel. However, there is doubt about whether or not these features will result in a victory for Apple this time. In additional to its physical aesthetics, the Watch has just the right set of features to make it a more attractive value proposition than other smart watches or sport watches.
The Apple Watch is priced at a point that allows it to effectively compete with some luxury sport watches that offer heart rate monitoring and GPS services. By including a heart rate monitor, Apple gives itself a leg up against other competitors, since most sport watches require users to purchase a separate accessory to use this service. Apple sacrificed the GPS capability in return for all day battery life as well as a minimized size of the watch. Considering the fact that the Watch can and will likely be used in conjunction with the iPhone, the GPS feature can be excluded for the time being.
The most important feature that gives the Apple Watch an advantage over its competitors is that developers can begin to create apps for the device as well as iPhone apps that allow the two devices to interact with each other in useful ways. But even without the use of the iPhone in conjunction with the Apple Watch, the Watch still has quite a bit of stand alone capability. The Watch can play music through headphones connected to the device by Bluetooth, it can tell time (of course), and the built in fitness app will record and keep track of your heart rate and physical movement. Users will also be able to use it with Apple Pay, since it has its own NFC technology radio.
Almost all electronic watches have become feature watches to some extent. They are all challenged by the value proposition of the Apple Watch. It is important to know that the electronic watch market is not a small market by any means – according to the Federation of the Swiss Watch Industry, 1.2 billion watches are sold each year, with 23 percent of that number being electronic watches.
Potential Profit
Investors previously predicted the gross margin on the Apple Watch to be 50 percent, and this figure still seems reasonable. Considering the fact that the Watch Sport versions, which are made out of aluminum, will be priced starting at $350. Higher end models made out of stainless steel will be priced starting at around $500, and even more luxurious models made out of 18kt gold will exceed the $1000 price point.
Regarding the number of Watches that Apple will sell, it seems that many analysts are underestimating the Watch’s potential impact. The average estimate for its first year is 22.6 million units. Other analysts say that the Watch will sell more than 40 million units in 2015. At an average selling price of $500 and gross margins of 50 percent, Apple will generate $10 billion in gross profit in just the first year on the Watch.
And that’s just the first year. As the company streamlines production and improves battery technology, the bulk of the watch will decrease, the screens will be enlarged, and more wireless communication features will be added. An entirely new set of apps will be available, like specially made games for the tiny screen. Apple Inc will continue to innovate and revolutionize with the Apple Watch, just as it has done with the iPod.
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