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Summary

  • No new hardware was unveiled at WWDC.
  • Information about iOS 8 and Mac OS X Yosemite does point to new products such as iWatch and Apple TV and helps define their characteristics.
  • When eventually announced this Fall, I expect these products to positively impact Apple's share price, despite having relatively small impact on revenue.

Apple (NASDAQ:AAPL) rolled out so many new software technologies on the first day of WWDC that it's easy to get lost in an enumeration of them, or, in the case of Apple critics, an enumeration of features that were already available on the critics' platform of choice, such as Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android. Such enumerations miss the point that Apple's technology development is always very product driven, and what is previewed at WWDC is intended to prepare developers for Apple products to come.

For this article, I would like to echo the product orientation, looking at key new products expected this fall, iWatch and the new Apple TV, then working back to the underlying software technologies that Apple is making available to developers this week. This will motivate the technologies better for non-technologists and make it clear that Apple isn't merely playing catch-up in features already offered by competitors.

iWatch and Wearables

I'm still convinced that the rumors that the iWatch will arrive this Fall are correct. However, the lack of any preview at WWDC persuades me that iWatch will not be a full iOS device capable of running general iOS apps as I had expected as of my last iWatch article. Developers would have needed to begin working on apps for the device in advance of a Fall debut. Although the iWatch will be iOS based, the number and type of apps will be restricted mainly because of the limited battery power of the device, which forces the processor to be much less capable than a typical iPhone or iPad.

This makes the iWatch even more of an iPod Nano than I had anticipated. Some took offense at my comparison of the iWatch to the Nano, but the Nano also reflects the impact of limited battery power on the capabilities of the device. Like the Nano, the iWatch will have video and music playback capability, as well as be able to run a few specialized apps such as the Nike fitness app. Rumors of a Health App for iOS 8 and built in biometric monitoring functions proved to be true, strengthening the argument in favor of iWatch as a health monitor and health data display device.

iWatch will also be able to respond to and initiate calls, as well as display messages and notifications relayed from an iPhone or iPad. Apple has introduced a couple of new technologies to support this it calls continuity and extensions.

In the most general sense, continuity gives iOS devices awareness of other nearby iOS and Mac OS devices and facilitates exchanging information between them. In one example, Apple demonstrated making a call from a Mac through a nearby iPhone. This elicited derision from many writers who observed that the capability had been available for years for other platforms.

True, but continuity is also about orchestrating peer to peer communication among iOS devices, so continuity becomes the enabling technology for iWatch to interact in useful ways with iOS devices such as iPhone.

Extensions provide a way for app developers to provide very limited functionality to another app or to the iOS system itself. The best example of this is Widgets, which will now be available in the iOS 8 Notifications tray. This has also been derided as Apple playing catch up with Android, which goes further than iOS 8 in providing Widgets in the home screen.

In its role as a notification device, extension Widgets could also appear on iWatch, with Widgets being transferred from a source device such as an iPhone to the iWatch. Widgets might be as close as most developers get to developing iWatch apps, but could provide a much enhanced functionality compared to what Google recently proposed for its Android Wear smart watch platform.

All of this functionality could be built into a next generation non-wearable iPod Nano as well, so what's the point of a wristNano? iPod sales have been severely cannibalized by iPhone and iPad, with 2013 Q4 sales down 50% (in both units or revenue) compared to 2013. If iPod has a future, it's as some form of wearable device integrated with other iOS devices via continuity features.

I continue to be optimistic about the market prospects for wristNano. I believe that smart watches will supplant electronic "feature watches" in much the same way that smartphones have supplanted "feature phones." In this vision of the future, consumers won't bother with a heart-rate monitoring or GPS enabled watch, but prefer the more versatile smart watch. With 276 million electronic watches sold in 2013 (according to the Swiss Watch Industry Federation), the market is not small, and offers wristNano plenty of room to grow.

Is wristNano the only future wearable device for Apple? No. Apple might integrate an iPod Nano class device into Beats headphones, or it might bail out of doing any wearable devices, leaving biometric sensors to third parties with data display in the Health app on iOS. These future possibilities can't be ruled out, but I still consider wristNano a good bet for the Fall.

Apple TV

As in the case of iWatch/wristNano, the lack of any preview for developers of the device at WWDC indicates that the next Apple TV will continue to be an iOS device that is off limits for general iOS apps. Apps for Apple TV (such as Netflix) are developed on a bilateral basis with Apple. The next generation Apple TV will make an important exception for iOS games. There are several reasons for this:

1) Cost. Apple TV is all about getting extra sales mileage from now obsolete Apple processors. The current Apple TV uses a single core version of the A5, also used in the iPhone 4s. Offering a full iOS capable Apple TV would require a more capable processor, increasing cost.

Then there's the problem of implementing iOS in a non-touch enabled device. The current Apple TV remote consists of little more than a D-pad. Apple has an innovative remote control solution as I recently described, but I'm now convinced that this, combined with a more expensive processor, would push a full iOS capable Apple TV too far above the current $100.00 price point. Games that utilize wireless controllers are the exception, since the controllers are relatively inexpensive.

2) AirPlay. Current Apple TVs support AirPlay wireless video streaming from iOS devices. In most cases, this obviates the need for native app capability in Apple TV. The exception is games. Often, the home Wi-Fi system doesn't support high enough frame rates, and game play becomes difficult or impossible.

3) Added value. Of all the things a consumer might want to do with Apple TV besides watching video, gaming appears to be the capability with the most added value.

Seeing the success of Sony's (NYSE:SNE) PS4 and Microsoft's (NASDAQ:MSFT) Xbox One game consoles, Apple is trying to bolster the competitiveness of iOS devices for gaming through the introduction of its Metal graphics software. Metal replaces OpenGL ES, which is the standard for 3D graphics for iOS and Android, and OpenGL is used by Mac OS X and Linux. OpenGL is roughly equivalent in functionality to DirectX in the Windows and Windows Phone worlds. Apple claims a 5x performance improvement for Metal compared to OpenGL ES.

Metal is Apple's way of squeezing more gaming performance out of its ARM (NASDAQ:ARMH) SOCs (Systems on Chip) and making them more competitive with Intel (NASDAQ:INTC) architecture processors, thus making Apple TV more competitive with the latest game consoles. "More competitive" doesn't mean "as good," but Apple TV doesn't need to be as good as the current consoles, if Apple can hold the ~$100 price point (excluding controller).

To get onto the new Apple TV, game developers will be required to support wireless game controllers at least, and probably Metal as well. Metal-based gaming on Apple TV addresses key factors that have kept the iOS platform from moving beyond casual gaming: small screens and limited processing power.

A gaming enabled Apple TV would be a boon to iOS game developers and boost sales of Apple TV as well. Apple faces stiff competition from Amazon (NASDAQ:AMZN) Fire, which offers some gaming capability, Roku, and Google Chromecast in the $100 set-top box category, but has been the market leader so far with 13 million Apple TVs sold through the middle of 2013.

Market Impacts

Together, the wristNano and new Apple TV will not have a large impact on Apple's bottom line, if and when they become available in calendar Q4. Previously I've estimated wristNano sales in its first quarter of about 3 million-5 million units, and I still think that's the right ballpark. I expect similar sales of 2 million-4 million units for the new Apple TV.

But I expect the market reaction to be out of all proportion to the sales impact. Apple will have finally put the new product bogey behind it, convincing investors that it really can create new products. Together with a larger screen iPhone 6 and revenue from Beats, Apple should post much better revenue growth in Q4 than in 2013, when growth was only 6%, further pleasing investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: What WWDC Says About Apple's New Products