Why The Apple Watch Won't Be As Expensive As You've Heard
/Yesterday, noted Apple blogger John Gruber released his list of predictions for the Apple Watch in advance of tomorrow's event. The post is pretty much required reading for anyone interested in speculating about the near future of the watch, and it focuses mainly on the topic of pricing. While I usually find myself agreeing with Gruber's perspective on things, I think he is completely misjudging Apple's plans for the watch, and particularly as regards to cost.
As a quick recap, Gruber is guessing the following as a few of the price points (I'm listing what he thinks will be the prices for the smaller, 38mm version):
- Apple Watch Sport, $349 (Apple already announced $349 as the starting price)
- Apple Watch, steel, Sport Band (plastic): $749
- Apple Watch, steel, Link Bracelet (steel): $1499
- Apple Watch Edition, Modern Buckle (38mm only): $9999
Apart from the already announced $349 at the low-end, Gruber is predicting significantly higher price points across the range than what others have been guessing to date. Factoring into his conclusions are the prices for similar styles in traditional premium watches. Why does pricing matter, particularly if it is high? Well, high prices will both increase the perception of the Apple Watch as a "luxury item" which appeals to some people, but those high prices also simultaneously make it unaffordable for a large percentage its possible market. Gruber predicts that there will be massive "shit-fits" in the tech industry around these high prices, and you can read his full rationale in his article. What I want to focus on here are the reasons why I simply can't see Apple charging those kinds of prices and why I think the Apple Watch will be much more affordable than Gruber is predicting.
Apple is a technology company.
Apple was not started to be a fashion or luxury brand. Those sorts of things were never the mission of Steve Jobs, nor are they now the mission of Tim Cook or Jony Ive. Thinking that Apple is going to price their smartwatch at a very high premium simply to to better be perceived as a competitive fashion brand is completely misunderstanding the company. Apple humanizes technology and succeeds by making the best computing or technology experiences, not the fanciest bling. What luxury watch companies and jewelry companies charge for their nice watches is completely irrelevant to what Apple will charge for theirs.
Apple DOES usually charge more for their products than comparable competing products, but that difference is rarely higher than a 20% premium over a similar quality and similarly specced competitor. The more premium segment of the existing smartwatch market is priced at about $300 (Motorola 360, LG G Watch). The $349 starting price of the Apple Watch fits right into Apple's usual range of premium cost. Moving up to the pricier versions of the Apple Watch (the steel and gold lines) will be priced according to the higher quality and cost of materials, but not marked up dramatically beyond that, because Apple is not making a Rolex, they are making a smartwatch with beautiful design and style options.
And despite the buzz over the last year or two about "maybe Apple is becoming a lifestyle brand or a fashion brand", there is zero evidence in their marketing or product announcements to suggest this. I don't count the fact that they hire extremely talented people like Angela Ahrendts and Marc Newson who have both worked in premium fashion brands previously as evidence that they are making those types of products themselves. Remember that at one point they hired John Browett from the cheap electronics chain Dixons (now Dixons Carphone) to run Apple Retail. I doubt the vision there was to turn Apple Stores into Carphone Warehouses.
Everything real and rumored in Apple's product pipeline is ALL about technology: Apple TV, the rumored car, the next iPad, the next MacBook Air. Even Beats Music (which some pundits thought was a "fashion brand" acquisition) is really just stylish technology priced at a 20% premium over competitors. And the big news from that acquisition a year later is a new streaming music service, not Apple branded sneakers.
Apple isn't going to price their next computing platform (watch computers) for only a small niche segment of the market.
Apple does currently target the top 20% of income earners with their products, in general, and I'm sure that will continue with the Apple Watch. But the difference between targeting the top 20% and the top 2% is literally an order of magnitude. For a company that wants to change the world through technology, a starting price of around $800 for the normal / for everyone steel Apple Watch is unlikely to win a wide audience. Having the regular, steel Apple Watch with steel link bands topping out at about $2000 makes it even more unlikely.
Let's put it this way. how many people do you know today who own a watch or even a computer / phone / tablet that cost $2,000 or more? Of that likely small number, how many of those people are likely to spend another $2000 on a discretionary tech product like the Apple Watch?
The argument that the Apple Watch Sport is the "entry level" version that is meant for widespread adoption doesn't hold water in my opinion. If that were the intent, it would be called the "Apple Watch Basic" or something like that. I'm going to take Apple at face value on their naming, and assume that the target market for Apple Watch Sport is people who want to use the watch primarily for fitness activities. And I'm going to similarly assume that the "Apple Watch" without any qualifier at the end is targeted to the average user / most users in general. Using that reasoning, would Apple really try to launch this new computing platform (which is not yet as technologically capable as a phone, a tablet, a desktop) for your everyday person at a price range of $800 - $2000? I don't see how they think that would work.
Would Jony Ive really force people who can't / won't spend $1000 or more on a watch to only be able to wear an aluminum Apple Watch with a plastic strap?
According to Gruber's pricing table, the regular steel Apple Watch with the cheapest leather / non-plastic strap would be around $900. And the majority of strap options for that watch would put it at over $1000. I really don't think that Apple or Jony Ive think that making the jump from an aluminum sport watch to a steel watch you can wear to work should require a $600 - $1600 extra investment in price. Nor do I think that the cost for the cheapest gold option would be priced 30 times (yes THIRTY) times higher than the base-level watch, when gold is the option I think the large majority of women and a significant percentage of men would choose stylistically for wearing to work or even everyday. It makes far more sense that the gold edition will be priced at a premium roughly comparable to the added cost of the gold and the manufacturing process used to produce it with an extra 20% or even 30% on top of that. I'm no expert on what those costs would be, but I think the $2,000 range is much more plausible for the gold watch than the $10,000 range.
Also note the positioning of the different watch models in the Apple Watch fitness promotional video from last September:
https://www.apple.com/watch/films/#film-fitness
The people wearing the Apple Watch Sport are clearly athletes and fitness enthusiasts, while the guy shopping for fruit and riding on a bicycle with his family is wearing the regular steel Apple Watch. The woman wearing the Apple Watch edition is a young working professional with stylish attire, but not someone who looks particularly wealthy based on her activities and portrayal (she drinks Starbucks and looks like she is a graphic designer or is an executive in a company that does graphic design).
Nothing about Apple's marketing to date implies different levels of wealth as a way of tiering the Apple Watches. Instead, it's all about utility (sports vs. everyday) and style (casual vs. upscale professional).
It doesn't matter what watch-lovers expect or are willing to pay for a nice watch.
A recurring theme in Gruber's pricing speculation is that even at the high prices he is guessing for the Apple Watch, it would be strikingly affordable compared to high end watches in the traditional watch industry. However, the market for luxury watches is a niche within a niche. For example, the most successful couple of watch brands I was able to find after an hour of searching online (TAG Heuer, Rolex) have annual revenues around $1 - 5 billion. The watch brand that sells the most units (Swatch), which includes mostly cheap (under $100) models sells around 16 million units per year. These best of the best yearly numbers (16 million units sold, $5 billion in revenue) wouldn't even constitute a good month for Apple and just the iPhone. Even if Apple stole the entire watch industry (they won't), it wouldn't move the needle because that's a niche market. And the luxury segment of that market is even tinier and more niche.
Apple isn't targeting the expectations and acceptability of watch enthusiasts specifically. To be a successful computing platform, the Apple Watch needs to be on the wrists of tens or hundreds of millions of people. That segment is hundreds of times larger than all the premium watch wearers on planet Earth combined, and frankly, if no premium watch enthusiast or member of the 1% of the wealthiest people in the world bought the Apple Watch, it would still be easy for Apple to sell a couple hundred million, assuming it was within reach of the next 20% of all people, cost-wise.
Watch enthusiasts aren't that interested in the Apple Watch anyway.
I've spoken to the few watch enthusiasts I know personally, and they are most interested in the intricacy and accuracy of mechanical movement and a unique style for a watch. The Apple Watch will neither be unique in style (it is a factory made, mass produced item) nor will it have any mechanical movement at all. Again, this is a technology product that looks like a watch. Not a traditional watch being made by Apple.
Watch enthusiasts may pay $10,000 or more for a watch, and it might have gold or other high end materials as part of it. But unless the watch is being purchased mostly as diamond encrusted gold jewelry (Cartier), all the premium bells and whistles are framing for that intricate Swiss or German watch movement inside. There is no way even a passionate watch lover would pay $10,000 for a Chinese factory-made watch that is identical to a $349 Chinese factory-made watch, except for the fact that the case is a gold alloy instead of a different metal in the $349 version.
I'm sure Jony Ive of all people knows that.
Apple doesn't NEED to charge so much.
Apple's margins are generally between 35% and 40%. That allows them to be wildly profitable and cover any financial needs they could conceivably have, while also reaching a large market with their technology. There is literally NO GOOD REASON why Apple needs to or should create a new product with margins that go as high as (according to Gruber's predictions) the 300% to 500% range or more. Not only is that not necessary, but it drastically limits the market for those products, which cuts across Apple's real mission of changing how people interact with technology.
So, to summarize:
- The Apple Watch is not a premium Swiss or German watch made by Apple, it is an Apple computer made to look like a watch. That means the public for the product are people who want a nice-looking Apple computer on their wrist, not people who want a precision luxury watch that happens to talk to their iPhone.
- The Apple Watch is Apple's next computing platform, not a niche fashion play. It needs to first and foremost be personal and relatable to a large market as a personal computing device. That will not be accomplished by making the ONLY sub $1000 option a aluminum / plastic / glass sport model, and tripling that cost to get to the steel / everybody version, and then multiplying the cost by another ten times for style-conscious people to get a watch they really like in gold.
- There is absolutely no precedent or need for Apple to charge 200% - 500% margins on a product, and what the watch industry does with pricing in its small niche is utterly irrelevant.
So, what are my pricing predictions? I think the Apple Watch pricing will be more along the lines of:
Apple Watch Sport - $349 (again, already announced)
Apple Watch (Steel) - $499 - $799 (depending on the strap type)
Apple Watch Edition (Gold) - $1,999
Fortunately, we only have to wait until tomorrow to find out which set of guesses turn out to best match Apple's plans. I can only say that I personally could not view Apple as a company the same way as I do today should they go down the path of super high-margin luxury fashion items, that segment users by income rather than intended use. And I hope that Gruber and others who see Apple going in that direction turn out to be as mistaken as I believe they are today.