Has The Apple Watch Flopped?

  • Analysts estimate Apple sold around 3.8 million units in the last quarter.
  • Apple already controls 20% of the smartwatch market, outperforming market veterans.
  • The device is important not only as a standalone device but as an enabler of future devices and features.

Apple reported its Q4 2015 results at the end of October, providing extensive data and additional color to most of the company’s businesses. Apple (NASDAQ:AAPL) released detailed sales information of its devices' product lines, unveiling that iPhone sales grew 22% YoY, iPad sales were down 20% YoY, and Mac sales increased 3% YoY; however, not a single number was reported for the Apple Watch. Looking at Apple data summary files, Apple Watch revenues were added to the ‘other products’ category, which includes iPods, Apple TV and Beats products. By hiding the Apple Watch figures within the ‘other products’ segment, the company leaves a lot of space for speculations around the new business' success.

In August, research firm IDC released its estimations of the wearables sales for the quarter ended on July 2015, presented in Chart 1 below. In this report, IDC estimated that Apple shipped 3.6 million units, which is slightly above Xiaomi and below Fitbit Inc (NYSE:FIT), who leads the category with 4.4 million units shipped. The sales figures for Apple position the tech giant in the top three for the wearables segment with a significant gap from the fourth top seller, Garmin, which sold only 0.7 million units. Even though Apple positioned itself pretty high on the top five sellers list, many were surprised that it lagged behind Fitbit and were expecting massive growth in the following quarter.

AAPL_Chart 7_111115

However, one-quarter later, the average estimations by analysts for Q4 2015 set Apple Watch sales at 3.8 million units, a minuscule 5.5% quarter-over-quarter growth rate. Compared to Apple’s high double-digit growth rates for other newly launched devices, this is a disappointing figure and might reflect how competitive and crowded the smartwatch market is. In fact, competition is so intense in the smartwatch market that Samsung only held 3% of the market share in Q2 2015. The low sales figures may be because of the Tizen OS, but the market share is significantly low for a reputable company that launched its first smartwatch product two years ago. Furthermore, players like Pebble, LG, Huawei, Sony (SNE), and Motorola all form part of the ‘others’ category even though they have a strong offering.

The CEOs of Pebble and Fitbit said in interviews to CNBC that their companies were not impacted by the Apple Watch launch; however, it brought a lot of attention to the market. This is the best example of Apple’s powerful eco-system and it's consumer electronics market positioning that enable the company to change segment dynamics completely. Apple priced its watches much higher than the other competitors and positioned it as a high-end luxury product sold for $700 compared to Samsung’s $250 watch, Sony’s $160 watch and Pebble’s $200 watch. Even though Apple is just the second biggest smartwatch player in the market, it probably generates the most revenues in the entire category and it easily outperformed smartwatch veterans like Samsung, Sony and LG.

Looking at the analyst’s Apple Watch sales figures, I don’t think the device is a flop but it is a pretty strong and significant player in that market that I believe will grow further and lead soon enough. The reason Apple does not release its Apple Watch figures (compared with Fitbit, Samsung, Xiaomi and others who release) is just to remain vague about their success. When competitors are not worried about the Apple Watch penetration, there is no reason for Tim Cook to shake them out of their comfort zone.

As currently the estimated sales units are low I don’t expect the Apple Watch to drive significant revenues in the short-term for Apple. However, it will enable a number of additional devices and features in the future like Apple Pay, smart glasses, IoT, other wearable devices and smart car. I believe that not only that the Apple Watch is not a flop, but an important milestone in Apple’s success going forward.

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