Apple Watch: A Superb Economic Moat Years in the Making
One of the more intriguing subjects that continues to puzzle me is Apple Watch competition. I struggle coming up with companies, or even industries, that are in a position to ship a credible threat to Apple Watch. While several companies have indicated interest in entering the space, I have doubt these players know where that space is even located. Apple has been building one of the company's largest economic moats in years with Apple Watch, a device with competitive advantages created from wrapping hardware, software, apps, and services into experiences. Apple claims the Apple Watch is only the beginning, while competitors aren't even sure what is about to begin.
Repeat of the iPad?
When Apple introduced the iPad in 2010, it took the competition a number of years to even figure out what made the iPad so "magical"; the experience from using a device where software and hardware combine to make the hardware melt away. I suspect a similar situation may occur with Apple Watch, only this time the economic moat surrounding the device may be a lot wider and deeper than it ever was with iPad.
Apple Watch Competition Sources
Luxury Watch Industry. Since Apple Watch will be worn on the wrist and Apple has stressed the device's luxury and fashion tendencies, it is natural to look towards the luxury watch industry for some kind of response to Apple Watch. Soon after the device was unveiled, the attitude towards Apple Watch was one of laughter and mockery. In recent weeks, several watch manufacturers have announced plans to ship their own smartwatch, competing against a device they had brushed off only a few months prior. The primary issue with expecting much of a competitive threat from a company like Swatch or TAG Heuer is that the value proposition of a luxury watch is different than that of Apple Watch. Luxury watches rely on craftsmanship and timelessness because their utility proposition was replaced years ago by phones. With the Apple Watch returning utility to the wrist, craftsmanship shifts to include hardware and software, while timeliness melts away. When a company's primary selling point is shipping a watch that can last forever, it will be hard to compete with a luxury device that positions time-keeping as merely a feature and is intended to be replaced every few years. Ultra-luxury watch manufacturers? I doubt they will even attempt to compete with a $349 gadget for the wrist that can be worn while working out. A $10,000 Marc Newson Apple Watch collection may be another story.
Technology Industry. If utility is returning to the wrist, technology companies would surely be in a position to come up with hardware devices controlled by software. We already see various smartwatch options being shipped today, although none have the right ingredients to truly stand out. Adding the requirement of having to wear the device adds a layer of complexity that I doubt most in Silicon Valley grasp. Fashion and design will matter more than a wearable's technological capabilities. Having a device on one's body extends that user's personality and emotion to something that will be on public display. The negative public reaction thrown at Google Glass serves as a prime example of technology lacking industrial design elements. Even then, designing a good product isn't enough. Fitbit and Jawbone bought in top designers to create their wearables, yet the devices haven't found success beyond niche markets as many question their utility and performance.
Fashion Industry. With a clear understanding of how fashion develops and morphs over time, those involved in the process of turning fabric and material into expression would be in a position to capitalize on the ability to appeal to a user's comfort level with wearables. However, the addition of technology into the discussion means that outside resources will need to be brought in to compete against Apple Watch.
Fitness Industry. The fitness industry had been one of the leading purveyors of the wearable industry. Nike exited the space in 2014, most likely in recognition of moving beyond a core competency and spending resources on not only the wrong bets, but at the wrong casino. The primary problem facing fitness companies and wearables is that fitness is niche. Appealing to fitness tracking limits the use case even further. The triathlon industry is well served by wearable gadgets from Timex and Garmin (among others), but with an addressable market numbering less than a few million, the numbers just aren't there for broader applications. Instead of pushing the idea of fitness, Apple will focus on health, a much boarder application that, in theory, applies to everyone. The biggest roadblock with health monitoring is that the concept indirectly advocates for behavioral change, including diets, routines, habits and schedules.
Entertainment Industry. Since today's culture seems to elevate celebrities and stardom, I wouldn't be surprised if there are a few attempts in Hollywood to monetize millions of Instagram followers into merchandising opportunities dealing with wearable devices that have to do more with what it says about the user than actual utility. Of course, lack of longevity would be a risk, but at that point, I doubt it would be a concern for those shipping such a product.
Other. There is always a possibility that single use-case devices could gain a solid footing, such as is the case with Disney's MagicBand, or a health-focused wrist band subsidized by insurance companies, threatening multifunctional devices like Apple Watch. Such specialized devices will not focus on the technology, design, or even utility, but rather some kind of limited, but intriguing experience. I would classify this type of idea as the true wildcard.
Partnerships and Acquisitions
The most likely source of Apple Watch competition will initially come from partnerships between the luxury watch industry and technology companies. TAG Heuer has already hinted at combining forces with a Silicon Valley firm, and it is not too much of a stretch to think of a scenario where technology companies partner with fashion houses in order to understand how to sell a wearable. Partnerships haven't exactly had the best outcomes in the past and I wouldn't expect anything to change in wearables. Partnerships are formed with the stated goal of joining forces, bringing together resources from two (or more) organizations. However, in that process of combining ideas, differing business models and organizational structures add complexity and friction that turn two companies working together to make an amazing product into two companies becoming desperate, cutting corners and making mistakes in order to stay relevant.
M&A within the current smartwatch industry is also possible as a near-term solution to appease shareholders and board of directors. Considering the deep pockets of large cap tech relative to many possible target valuations, these acquisitions would be sold as low risk/high reward, similar to how every other tech acquisition is marketed.
Apple Watch Competitive Advantages
The Apple Watch embodies Apple's philosophy of combining multiple disciplines (technology, health, arts, payments) into one experience. Competitive advantages include:
1) Engaged iPhone User Base. Apple Watch is dependent on iPhone for a few reasons, including being able to send computing requirements to a much bigger battery. Having an engaged base of more than 400 million users (most using the latest software) is an advantage Apple holds that currently no other company can match.
2) Technology. By relying on customized components, such as the Apple S1 chip, Apple will force competitors to cut corners with less attractive alternatives where the end goal is to have as few compromises as possible.
3) Efficient Supply Chain. Apple has built a supply chain that is capable of producing nearly 100 million iOS devices in a quarter. The ability to efficiently scale production of not only Apple Watch 1.0, but updates and new versions in subsequent years, is an asset that can not emphasized. Apple's ability to control various component supply, such as sapphire watch faces, could also pose a problem to competing products.
4) Vibrant Developer Ecosystem. As seen with iPhone and iPad success, developer support is crucial for ushering in personal technology with Apple Watch. While the current level of developer functionality found in WatchKit may be underwhelming to some, developer interest in the device exists with many wanting to try the device before thinking of ways to expand iOS apps to Apple Watch.
5) Apple Retail Stores. Apple's 447 retail stores provide a great opportunity for consumers to try Apple Watch in a setting managed by Apple. While 447 points of sale will pale in comparsion to the eventual network of retailers that will sell Apple Watch, the Apple retail stores serve as a starting point to get millions of Apple Watches out in the wild. The best form of marketing will be word-of-mouth and simply noticing the device being used by early adopters.
Missing Pieces
One theme when discussing possible Apple Watch competitors is that there are very few entities that hold all of the pieces needed to ship a viable product. For companies focused on luxury design, the technology aspect of the device makes it difficult to do much besides partnering with others. Technology companies likely lack the design talent to turn components into something consumers will want to be seen wearing. Apple Watch's dependency on a phone can also not be understated as any competing device won't have the same vibrant ecosystem to build on, which I suspect is an issue many in the watch industry don't quite fully comprehend.
Years in the Making
Apple has spent the past four years creating a device that deserves to take up the few square inches of wrist real estate where proper line of sight and touch accessibility can help usher in a new era of personal technology. I suspect it will take a few years for other companies to even think of the Apple Watch in this way, let alone be in a position to ship a competing product. Companies will monitor how the Apple Watch sells out of the gate to see if the device is worth responding to, only delaying attempts at competing. The Apple Watch relies not only on the latest and greatest smartphones, but design and fashion concepts that are expensive to copy and master. Being able to put all of these pieces together into a marketable product makes it clear that Apple has built quite an economic moat with Apple Watch, and the iOS ecosystem stands to be the primary beneficiary.
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