This week's Apple (NASDAQ: AAPL) event in Cupertino was expected to focus on the new iPhone and iPad products that drive significant revenues for the company. The Apple Watch barely moves the revenues needle for the quarterly earnings reports and therefore receives proportionately less resources and attention. In addition, the widely accepted acknowledgement that the Watch's sales have been disappointing may have diminished the resources being allocated to the Watch since its launch almost one year ago in April. So expectations were not high for the amount of upgrades, resources and improvements that Apple would announce for the Watch at this event.
But even with the lowered expectations for the Apple Watch we were surprised that the only assistance given by Apple to this struggling product was a few more watch band choices. Even just a software upgrade to improve the glaringly obvious flaw of the Apple Watch's brief, one-day battery life would have been a big help. But no such help was forthcoming today from Apple for the flagging Apple Watch. This lack of support for the Apple Watch in the marketplace helps the wearables category pioneer and leader Fitbit (NYSE: FIT). Fitbit continues to grow market share, strengthen its first-mover advantages and grow its defensible moat that is getting stronger every day around its superior ecosystem in wearables. With almost twice the market share of Apple, Fitbit is the undisputed worldwide leader in wearables.
Investors should take notice that Fitbit took back market share from both Apple and Xiaomi (PRIVATE: XI) during the important 4Q15 holiday quarter as shown in the graphic below:
Importantly, the above graphic showing Fitbit taking market share from Apple was prior to the successful launch of Fitbit's Blaze, a smart fitness watch. Now the acquisition of increasing amounts of market share by Fitbit from Apple has very likely accelerated since Blaze is literally selling out of stock at big-box retail stores and also out-selling the Apple Watch on Amazon (NASDAQ: AMZN) by at least more than a ratio of 5:1. The Apple Watch used to be the best-selling smartwatch on Amazon while Fitbit's multiple products dominated the fitness tracker sub-category in wearables. Now that Blaze has launched in the smartwatch sub-category in direct competition with the Apple Watch, the Apple product has fallen from the number one spot to the number six spot on Amazon's best-sellers list for smartwatches priced above $100. Impressively, at the time of this writing Blaze now occupies all top-five spaces ahead of the Watch on this Amazon list. Fitbit's Blaze has actually taken all five top spots on this best-sellers list and has pushed the only Apple product able to compete down to the number six spot. This kind of clear market feedback from an online channel check as powerful as Amazon cannot be ignored by reasonable people and prudent investors. Those who want to diminish the importance of the Amazon retail channel do so at their own expense.
A brief history of the Watch helps to put this product's curious evolution into context. The Apple Watch began accepting pre-orders on April 10, 2015, and started shipping on April 24th. The initial Watch product launch was preceded by much fanfare and hyperbole, which was quickly followed by a 90% plunge in sales. The plunge in sales was followed by awful holiday sales of the Apple Watch. Please reference a previous article Apple Watch Vs. Fitbit Blaze: The Early Winner May Surprise You for a list of reasons why the Apple Watch is struggling in the marketplace while Fitbit products are winning.
After the Apple Watch delivered disappointing holiday sales it was met with more bad news as the arrival of the Fitbit Blaze began to compete directly, head-to-head, with the Apple Watch in its own smartwatch sub-category. It is important to recognize that wearables are divided into two primary sub-categories called fitness activity trackers and smartwatches. Fitbit has dominated the fitness activity tracker sub-category for many years but had no entry into the smartwatch sub-category. With the recent arrival of Blaze, called a smart fitness watch, it now appears that Fitbit also is dominating the smartwatch sub-category at the expense of Apple's Watch. It is likely that the upcoming quarterly IDC reports in 2016 will show a continuation of the 4Q15 action of Fitbit taking market share from Apple in wearables.
The latest event for the Apple Watch's evolution came this week as Apple announced only a few new watch bands and a price cut for the Apple Watch. This surprising lack of support by Apple for the struggling Watch nearly a full-year after the products disappointing launch speaks volumes. Even if Apple had invested the resources to at least bring some kind of a software upgrade for the Apple Watch that maybe could have extended the brief, one-day battery life of the Apple Watch then that would have shown some degree of commitment to the Watch. But by only bringing the cosmetic effort of a few new watch bands to the table for the Watch, Apple gives the appearance of being unconcerned with regard to this marginal product. And the price cut from $350 to $299 on the Apple Watch just reflects how poorly the consumer is receiving the Watch. In fact, the Apple Watch retailed for only $250 during much of the holiday sales season and it did not seem to help sales very much, so the current price cut down to $299 may not help much either. But the price cut will substantially reduce both revenues and profit margins on the Watch at Apple when the company already must have been receiving a low ROI on this product even prior to the price cut. The lack of resources being given to the Watch along with the price cut speak loudly about Apple's plans for the future of the Watch.
Apple is a company struggling with decelerating growth in its core businesses and may be facing for the first time ever a decline in YOY growth for its iPhone business that recently accounted for 63% of Apple's revenues. This significant problem of declining sales growth in core businesses can only detract from Apple's resources applied to the Watch, which barely contributes anything significant to the quarterly revenues.
In addition to flagging sales across the board at Apple, CEO Tim Cook recently chose to self-inflict a public relations nightmare upon Apple. Cook could have chosen to handle the issue of opening the San Bernardino terrorist's cell phone quietly and properly. Instead, Cook chose to make a dramatic, activist stand against the U.S. government that can only end badly for Apple and its shareholders.
This level of distraction at Apple and its impact upon worldwide sales is unlikely to be positive as neither the consumer nor the U.S. government appreciates Cook's grand-standing and lack of assistance on fighting radical Islamic terrorists. Because of Cook's poor handling of this issue, now the worldwide consumer is watching as Apple is now in a lose-lose situation. Bill Gates has admitted that taking his company Microsoft (NASDAQ:MSFT) to war against the U.S. government was one of the major regrets of his career. Cook's folly in choosing to bring this negative distraction upon Apple will likely make the problems with the struggling Watch pale in comparison to the much bigger fish that are now frying at Apple. This may well mean even fewer resources for the Watch at Apple, while Fitbit continues to stay focused like a laser beam on their core mission of continued innovation and dominance of the wearables category.
It is understood that Apple will often employ the one-year upgrade cycle to successful products that merit the commitment of resources by the company. It is clear that there is a lack of consumer demand for the Watch and this may have contributed to the decision to bring almost zero support for the Watch during this week's Apple event at company headquarters. Likewise, the version 2 upgrade for the Watch has been postponed to an expected September/October release, which would be about 18 months after the original launch of the Watch. Again, low demand by the consumer can be a partial reason for this delay. But there may be another significant reason for the lack of current support and the delay in the upgrade cycle: battery life.
Battery life of the Watch may be one of its biggest weaknesses. Because the number of apps on the original watch draw so much power, the Watch must be re-charged at least daily and some high-use consumers complain of far less than one day of battery power. Compare this with the Fitbit products that deliver five days battery life, thereby enabling valuable features like sleep tracking that are important to the consumer but not possible with the Watch. The convenience factor of a five-day battery life is also really important to the consumer. Apple has missed badly on this point in a wrong-minded effort to overload the Watch with far too many apps that the consumer finds useless. The sales numbers between Fitbit products and the Watch speak loudly on behalf of the consumer choices with regard to issues such as battery life.
So Apple's failure to bring improvements to the Watch at this week's event and the delay in the product cycle upgrade may not just be due to weak consumer demand for the Watch. There also may be an inability to deliver any meaningful improvements or upgrades in tech for the Watch. It will be interesting to see what the excellent engineers, designers and developers at Apple can deliver for the Watch2 expected this Autumn. But we should not expect miracles since the original Watch apps have already maxed out the pre-requisite battery life capacity of this device. Hopefully, improving the one-day battery life issue is a priority for Apple to innovate and advance. If not, then they will be limited in bringing any other substantial upgrades to the Watch2 unless they are willing to re-engineer the device from the ground up and become more focused on delivering what the consumer wants. The "Swiss Army knife" approach to smartwatches with a product that tries to do too much is not what the consumer wants. Fitbit has demonstrated an accurate understanding of what the consumer wants as communicated in the graphic below:
Variant view: Here is what caught our attention in this week's Apple Day event in relation to the future of the Watch: While Cook presented HealthKit as an app primarily for the iPhone, he failed to mention this app can also be used with the Apple Watch OS. Mobile health (mHealth) is going to become the future for each of us, our employers, our insurers, our healthcare providers, and maybe even our governments. If Apple can see past the many other distractions and demands that are pressing them now, and see how large the future of mHealth is going to be for all of us and future generations, then Apple will commit the resources necessary to help lead and pioneer in this valuable, nascent category of wearables. HealthKit is an important step in that direction. Apple needs more resources dedicated to the advancement of mHealth-related apps and hardware and less resources wasted on damaging public relations debacles that embattle a publicly traded company with a more powerful entity like the U.S. government. This more business-oriented focus would serve the best interests of shareholders better while freeing up resources that enable Apple to return to its successful roots of innovation and product development.
Summary: While these early days of wearables are beginning to make the direction of the trend toward mHealth clear, the innovation by companies like Fitbit and Apple are just barely scratching the surface for what is to come. The growth in this huge mHealth wearables industry will be increasingly important for Apple's stock price in the years ahead, but for the mid-cap pure-play in wearables called Fitbit the future is now. The coming innovations delivered by the army of engineers, designers and developers being hired by Fitbit will launch this company to a level higher than many investors are currently envisioning for Fitbit. And the rapid, high-growth rate of the overall wearables category will ensure that multiple companies will be able to compete and succeed during the decades ahead for wearables. At this time it looks as if Fitbit, Apple and possibly Samsung will be the industry leaders of the wearables category in the future. Whether other companies also can raise their level of innovation and quality of products in wearables will determine their chances for survival and advancement in this increasingly important industry of wearables and mHealth.
Disclosure: I am/we are long FIT, AAPL.
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.
Additional disclosure: I have sold half of my Apple position recently. I plan to sell the remaining half of my Apple position into any strength offered by the release of the next generation iPhone. I am not bullish on future growth prospects for shares of AAPL.