MorningWord 4/27/15: $AAPL Watch Party

by Dan April 27, 2015 9:38 am • Commentary

After the close Apple (AAPL) will report their fiscal Q2 results (read our fiscal Q2 preview here). This event is already being viewed as the next step to becoming the first company to ever reach the $1 trillion mark.

iPhone sales in the previous quarter were close to 70% of the $74.6 billion in total sales reported in the holiday period. It was the first full quarter of sales of the iPhone 6 & 6 plus, and that percentage of sales was its highest ever. What’s staggering about that fact is that the iPhone’s continued success has essentially destroyed the last major product the company introduced (prior to the Watch), the iPad.  Back in 2010, when the iPad was introduced (just three years after the iPhone) many feared that the tablet market would halt some of the growth in the smartphone market and that AAPL had the potential to cannibalize iPhone sales.

That could not have been further from the truth, and speaks to a point I have made in numerous occasions over the last few years, that the iPad, especially the iPad at a price point generally 2x that of its competitors was very much a luxury discretionary item, unlike the necessity of a smartphone.

The Watch will be similar. Despite modest expectations, it is hard to believe a revenue contribution of 10% of AAPL’s expected $228 billion in sales this year and $240 billion next. Twenty five million Watches sold at an ASP of around $500 gives you about $12.5 billion, or about 5% of expected fiscal 2016 sales.  I would argue that that lower number is certainly achievable but at the same time, a good part of those sales will likely come at the expense of some iPad sales.  I would also argue that the Sport version, the only one that I would consider wearing (and have an order in for, 50 delta chance I actually keep it) should have been the company’s focus, to redefine the Fuelband/Fitbit category. It is my view that AAPL might have missed the mark a bit on their first wearable. If they had gone straight for the mass market with a lower priced health monitoring sport version, rather than going fashion and tech I think they might have seen greater adoption for their first effort at a much lower price point. But whatevs. I am sure Tim Cook and Jonny Ive have given this topic a little more thought than I have.

Lastly, I suspect that a so-so reception to the device has the potential to highlight the fact that the company no longer has a monopoly on consumer electronics innovation. And for those who think that Pay, Apple Beats Music, iCloud and the rumored TV service are likely to kill, I would remind you of just how bad the company has been on on-the-line services.  Remember MobileMe, Maps, Siri, AppleTV’s clunky inteface, the new Pictures and iCloud which to this day continues to confound me and thousands of others.

I am a huge Apple product fan, have at least 20 in current use in my family and business, and while I think my iPhone 6, MacAir and iMac are the best technology products I have ever owned and that are currently on the market, I am less convinced by almost every other product like iCloud, AppleTV and possibly Watch that the company will be able to capture my imagination and discretionary dollars for other products in the near future.

So to bring this whole thing full circle, AAPL is the iPhone company, with 70% of sales from the device. They better be able to maintain market share at an ASP more than double that of Android that has almost 4x their global market share.