Please ignore this if you are not interested. Bert suggested a possible use
for the AM band to deliver a time service like WWV, noting that AM radio is
archaic technology. I countered that analog watches are archaic too; the Swiss
sell lot's of expensive analog watches...
Not so fast. Looks like that market is tanking in the face of the smart watch...
Regards
Craig
http://seekingalpha.com/article/3601446-apple-watch-putting-a-dent-in-the-swiss-watch-industry?app=1&auth_param=7fgjr:1b2s3uh:2317a1501810fb224d9a9f24a574a53b&uprof=45
Apple Watch: Putting A Dent In The Swiss Watch Industry
Summary
Apple Watch sales for the September quarter could double the June quarter.
Apple Watch could generate nearly $2 billion in revenue.
As Apple Watch sales climb, Swiss watch sales have declined dramatically.
Apple (NASDAQ:AAPL) is expected to sell about 4 million Apple Watches for the
September quarter. If it does, this will represent a huge victory for the
company. Apple will have established that it really can successfully enter new
hardware categories. Within the span of a single quarter, Apple has established
not merely a new product, but almost a new industry, with unit sales more than
half of total Swiss watch production for the quarter. In the process, Swiss
watch exports declined by 7%, and even more in the price range of a typical
Apple Watch. Apple is no longer merely a competitor for single companies, but
for entire industries.
Swiss Declines
The estimate of 4 million Apple Watches sold in Apple's fiscal 2015 Q4 comes
via Philip Elmer-DeWitt and represents a rough median of his poll of analysts.
This is almost double what I estimate Apple sold in the June quarter, 2.1
million units. At an assumed $450 ASP, this will add another $850 million to
Apple's top line compared to last quarter.
In the same quarter, Swiss watch exports declined y/y about 8% to 7.1 million
units, according to data supplied by the Federation of the Swiss Watch
Industry. Although the unit decline was not large (about 600,000), most of the
decline was in the critical price category of 200-500 Swiss Francs ($210-524),
right where the Apple Watch ASP sits. This can be seen in a chart for the month
of September provided by the Federation.
Geographically, the declines in Swiss watch exports have been most pronounced
where Apple is very strong. In September, exports to the U.S. were down 17.6%
y/y, exports to China were down 13%, and exports to Hong Kong were down 18.2%.
Value Proposition
The advantage of Apple Watch has been that it simply provides much more
functionality than conventional medium-priced watches. In addition to being an
extremely accurate timepiece, the Apple Watch can remind you of appointments
and show upcoming events on the user's personal calendar. Combined with all the
other features the watch provides, it's an unbeatable value.
The superior value proposition of Apple Watch will continue to erode other
advantages of style and status that expensive mechanical watches, mainly Swiss,
have hitherto enjoyed. Yes, the Apple Watch is kind of chubby, and it will
never have the cache of a Rolex. So what? The Apple Watch has gone for the
sweet spot, and the entire industry, not just the Swiss, are going to be
bleeding profusely as a result.
The Huge Opportunity
This isn't just about the Swiss. As this report on 2014 global watch production
makes clear, watches are a huge business. In 2014, the top 6 exporting
countries, produced a total of 1.05 billion watches, of which about 770 million
were electronic.
Smartwatches have made the electronic watch obsolete. I believe that most
electronic watches will be smartwatches in a few years. So the total
addressable market for smartwatches is about 600-700 million per year,
including the upper end of the e-watch market and the lower end of the
mechanical watch market.
Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android Wear smartwatches may get more
of this, simply by virtue of the larger installed base of Android phones (over
a billion). Apple's available watch compatible base can be estimated as follows.
Apple has shipped a total of 774 million iPhones, as of the June quarter. Of
these, about 500 million are iPhone 5 or newer generations that can run the
newest iOS 9 and be paired with Apple Watch. Assuming an attrition rate of 90%
for these newer iPhones, this leaves Apple with 450 million available customers
for Apple Watch. So Apple could go on selling Apple Watch at the rate of 4
million a quarter effectively forever.
Except that, I expect Watch sales to accelerate. Since the early sales in the
June quarter, Apple has been accelerating the availability of Apple Watch,
first to its own stores, and then to large retailers such as Best Buy. Putting
the Apple Watch on display in retail stores has been critical to building the
audience for Apple Watch. The watch was just a little too expensive for most to
buy exclusively online, as Apple required at launch.
A Watch Apart
Most importantly, the Apple Watch is only going to get better with each
succeeding generation. Following Apple's usual practice, succeeding generations
will be sleeker, be able to do more, and have better battery life. As Apple
adds value to the device, I expect sales to increase.
Even as Android takes most of the unit sales of smartwatches, I expect Apple to
take most of the profit, as it does now with smartphones. The reason for this
will be as it is for smartphones. Apple Watches will all contain Apple's own
custom designed processors, just as iPhone does. These processors will have
superior capability to any commodity smartwatch processor, especially from
Intel (NASDAQ:INTC). The Apple watchOS will provide superior integration with
the rest of the iOS ecosystem, and the abundance of apps will also be an edge.
Combined with Apple's design flair and obsession with quality, Apple Watch will
be a smartwatch apart from the rest of the commodity Android Wear watches and
will continue to command a premium price. Apple reportedly had early production
problems that limited the gross margin of the watch. These problems have
apparently been resolved, judging by the wide availability of the watch.
Therefore, I expect Apple Watch gross margin to converge to Apple's corporate
average of about 40% for the September quarter. At sales of 4 million units,
that's $720 million in gross profit from this new product line. Apple Watch
sales alone could add $540 million in operating profit, using Apple's typical
operating margin of about 30%. These are excellent results for a brand new
product category.
