Technology is our friend: Theory: Why the Apple Watch may be evidence that we will see Apple Car
Back To Normal

March 12, 2015

Theory: Why the Apple Watch may be evidence that we will see Apple Car

[quicker read of this post in my microblog]

I have speculated before about the impact of the Apple Watch on the Swiss luxury watch market (here, and a German post about luxury here). Little did I know. Like many others, I did not expect that Apple would define a price range with a  +16k USD price spread. Unlike normal technology pricing, the range is not defined by ability, processor, apps, functions, hardware specs, but by material alone. This is a completely new logic to technology product sales and marketing - if it is a logic at all. I believe it is borderline insane and very risky. But there may be a good reason to take that risk.

Why is it illogical? Imagine: In 3 years time, you will be able to get a Huawei, LG, Pebble or whatever watch for 150 USD that will, by technology standards, ridicule your 17.000 USD Apple Watch Edition. Here's my try in two images to visualize why I think that a luxury technology watch is completely irrational:

The Verge provides a very good overview about the fundamental reasons that drive people to buy a luxury wristwatch that may be more expensive than many middle class families' cars. There's a technology fascination, but focused on (custom made) mechanical movements, and there's a human value - the handmade aspect that (scaled) technology will never be able to provide. And, of course, there's an irrational element to this as well (and has to be, since timekeeping is a commodity). But like with any irrational purchase decision, there's a profound and socially accepted "path of rationalization" that any luxury watch buyer can refer to: longlasting, maybe even increasing value. This is in essence the great value of Patek Philippe's beautiful claim:

 "You never actually own a Patek Philippe. You merely look after it for the next generation."  

This, of course, cannot happen with technology, outside of some freak incidents like having a working Apple I computer in your attic. Compare this:

The IWC Portuguese sold for 8500 USD in 1993, the Apple Newton PDA was sold for 700 USD. By 2020, replace the Newton with the Apple Watch. No need to replace anything on the left side, though.
Of course it's apples and oranges (pun intended), but that's basically what Apple tries to merge with their watch - two things that do not belong together: Quickly obsolete technology and materials of high value that are made to last forever (it would be different if they announced that with an Edition watch, the generations 2,3,4 etc. will be integrated into your gold case - but they can't as the case and hardware itself will change, too).
But this does not mean the Apple Watch will not be a huge success. If anyone can establish completely irrational product pricing and version logics, it's Apple. And maybe sheikhs, oligarchs, rich kids of instagram, Floyd Mayweather and some drug lords, basically people who would burn money for fun when they are bored, are enough clients to make the Edition a success, especially on the margin side of things.

But why take that risk? Who would have complained if the watches would have ranged from 350 - 1500 USD? Probably the shareholders, after some time. Wired published an article based on the theory that a company with a valuation of 700 billion USD cannot focus on 300 USD products because it would have to sell one to basically every middle class household in the world to make a measurable impact on their way to reach a one trillion valuation. There's something to this thought; while the forecasts for wearables get more insane each day, we don't even know if the watch will be the dominating category and if we really need one - I tried a Pebble and an LG watch and sold both. The value of notifications on my wrist isn't there. Either the message I receive is important, so I pull out my phone to handle it, or it's not important, and I don't want it on my wrist, vibrating and adding to my stress level. I imagine that to me, "physical value" will be the smartwatch play - unlock my DriveNow car with my watch, open hotel rooms, pay my stuff (without worrying about battery life) - that would be something besides fitness tracking that I'd like to have on my wrist. So the "normal smartwatch market" will unlikely - or with a high uncertainty - lead to a 100million+ device market within the next 2,3 years for Apple. A way to make impact on the balance sheet and margins is then to increase the price - less units sold, more earnings - and that's what Apple did. It is still a bet, an insecure one, too, but seen before the insane scale this company needs for further growth, it becomes an at least more reasonable strategy.

If you follow this path, Apple would have to scale their software business (because of the potentially huge margins) or move into different areas of hardware - or both. Apple Pay is what I would consider a highly scalable software business, supported by Apple hardware. But as I firmly believe that Apple is first and foremost a hardware company - future growth (again: growth that impacts their insane scale) cannot come from a new Mac every few years and not even from their terribly overpriced accessory dongles that will now allow you to use a USB drive with a MacBook for a mere 79 USD. From this angle, the rumors about Apple offering cars make total sense. Business Insider offers an overview about units shipped anually versus market size/value:

That looks like a market that can use some disruption and promises enough potential to actually reach the one trillion valuation. There are many sceptical voices and others that just rule out that this would even be an option, but obviously shareholders are very fond of the idea, And there have always been sceptics before markets have been disrupted. Like Steve Ballmer laughing about a 500 dollar phone without a keyboard.

If any company in the world has the resources to pull something like this off, it's Apple of course. And there's contradictory reports about whether Millenials want or do not want to own cars, but that refers to cars the way we know them now; again: if any brand has the ability and power to attract completely new target groups to re-invented products, it's Apple.

Following the theory that a 20 million unit scale of a 400 USD product is more or less meaningless to a company like Apple is my preferred explanation for the illogical, adventurous, bold and risky price/version positioning of the Apple Watch. The only other theory that is plausible to me is "because we f-ing can", but that's not how huge corporations work. So if the first theory is right, and they follow that path, building cars is more or less inevitable (because houses/construction, planes, ships, weapons and laser swords are even more complicated markets).

Bonus track: The true story behind the USB-C MacBook.