Hardware

How Apple's iWatch Can Be a Moneymaker


How Apple's iWatch Can Be a Moneymaker

Photograph by Eric Helgas for Bloomberg Businessweek

Few tech prophecies are as played out and discredited as the Dick Tracy watch. Since the crime stopper first strapped on his two-way radio in 1946, corporate giants have wasted millions of dollars experimenting with wrist-mounted computers their customers don’t want. From Casio’s calculator watches in the 1970s to Seiko’s mini-keyboard models in the 1980s and Microsoft’s (MSFT) Web-connected watches a decade ago, the public has consistently dismissed such devices as geeky novelties. While Sony (SNE) still sells a line of $129 SmartWatches that can be used for e-mail, tweeting, or playing music, it hasn’t sold many. Into this graveyard of tech empires steps Apple (AAPL).

A team of about 100 is working on Apple’s stab at a smart wristwatch, which the company hopes to introduce in the fall, according to a person familiar with the plans. In addition to timekeeping, the person says, the gadget will likely serve as an iPhone accessory, allowing users to make and receive calls or check map coordinates while leaving the phone in their pockets. Other features include a pedometer and possibly a heart monitor. U.S. Patent and Trademark Office disclosures show that Apple has filed at least 79 patent applications since 2001 that include the word “wrist,” one for a device with a flexible screen powered by kinetic energy.

This is more than just hubris, says Bloomberg Research analyst Anand Srinivasan. If Apple can persuade the general public to accept an iWatch as a substitute for a conventional timepiece, it has a good shot at a business with gross margins around 60 percent—four times that for TVs and comparable to the company’s most profitable product, the iPhone. Laurence Balter, chief investment strategist for Oracle Investment Research, says an iWatch could expect iPhone-like gross margins of 50 percent and 50 million units sold within six months. Former Nike (NKE) Global Creative Director Scott Wilson says a $125 sports watch’s bill of materials could cost the seller less than $50. Citigroup (C) analyst Oliver Chen says the entire watch business can expect overall sales of more than $60 billion this year, and “this can be a $6 billion opportunity for Apple.” The trick, he says, is to design “something consumers didn’t even know they needed.”

Apple has prevailed before in markets where others failed. There were plenty of digital music players before the iPod, smartphones before the iPhone, and tablets before the iPad. It’s not the only company angling for entry into the so-called wearable computing market, though. Palo Alto-based startup Pebble Technology has already received tens of thousands of preorders for its $150 smartwatch, which connects to a user’s smartphone wirelessly and displays call notifications and previews of e-mails and texts. Pebble’s watch is compatible with both Apple and Google (GOOG) software, as are similar products sold by startups Martian Watches and Meta Watch and one pending from startup Smartfitty.

Conventional watchmakers seem less interested in developing their own smartwatches. Fossil (FOSL) Chief Executive Officer Kosta Kartsotis said during an earnings call last month that although his company has looked into making smartwatches, it has concluded that the real money still lies in old-school timepieces.

Apple could use a boost. Since its peak in September, the company’s stock has slumped by more than a third to $425 because of concern over slowing iPhone sales and competition led by Samsung Electronics. The smartwatch appears to have been a longtime dream for Apple design chief Jony Ive, a luxury watch aficionado. Back in the mid-2000s he sent his team to watch factories and asked Scott Wilson to send him a box full of Nike sports watches, Wilson says. (Ive couldn’t be reached for comment.)

It’s less clear that Apple can persuade others to share Ive’s dream, especially if his watch turns out to be a peripheral that still requires users to whip out their phone to, say, respond to a call or tweet. Still, says NPD Group analyst Marshal Cohen, if any company is equipped to close the deal, it’s Apple. “They have the opportunity,” Cohen says, “to get everyone that owns a cell phone to go out and buy another watch.”

The bottom line: Apple’s attempt to make a smartwatch has no successful precedents, but the device has potential margins of 50 percent or more.

Burrows is a senior writer for Bloomberg Businessweek, based in San Francisco.
Olga_kharif1
Kharif is a reporter for Bloomberg News and Bloomberg Businessweek in Portland, Ore.

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