Apple Watch Price Reduction Highlights Sell-Through Issues

| About: Apple Inc. (AAPL)
This article is now exclusive for PRO subscribers.


Wearables don't exhibit a must-have feature.

Pricing is an issue with Watch distribution.

Wearables offer redundant applications and features.

In early March, I authored a publication titled "Apple Watch: Already A Lost Leader." The purposely-positioned title denoted the proclivity of Apple Inc. (NASDAQ:AAPL) to lead new and existing categories over time. Having said that, the Apple Watch has positioned Apple in a precarious way within the wearables and/or fitness tracker category. The Apple Watch may be a wearable smart watch, but Apple's approach to the sub category of fitness trackers has been anything but smart in my opinion.

Technically, the Watch is a smart watch, but in terms of usage all those many apps and notification capabilities fail to generate greater usage by consumers. Most consumers use the Watch and other smart watches/wearables for health and wellness or fitness tracking purposes. Given this understanding, the Watch is definitively a fitness-tracking device. To argue otherwise would be to argue with the consumer, Apple Inc. and how they see consumers using the device more often than not. It is also with this understanding that Apple's greater and more recent application addition is designated for health and wellness/fitness tracking.

It appears that the next Apple Watch will have more health and wellness applications through the employment of CareKit. With the ability to share information with doctors, nurses or family members, CareKit apps help people take a more active role in their health. Here's what the company had to say about CareKit more directly:

"We're thrilled with the profound impact ResearchKit has already had on the pace and scale of conducting medical research, and have realized that many of the same principles could help with individual care," said Jeff Williams, Apple's chief operating officer. "We believe that giving individuals the tools to understand what is happening with their health is incredibly powerful, and apps designed using CareKit make this a reality by empowering people to take a more active role in their care."

I will be the first to recognize that adding health conscious features to the Watch is a benefit to the consumer. Having said that I don't think it will be a driving feature behind increasing sales for the Watch. In addressing the usefulness of a smart watch or any wearable of concern, these products don't exhibit a must have feature. While many have been of the opinion that wearables address or will address the future epidemic that is obesity, history details that the only variable that can impact this epidemic is "will power."

Wearables have been in existence for the last four years on a mass-market scale and the obesity epidemic has only increased over this time. Addressing this epidemic with wearables is not a bad thing and I don't desire readers to understand my sentiment toward wearables to be defined as such. Wearables simply don't actively participate in the health and wellness of the average person. The gadgets passively track data achieved through sensors and algorithms and beg of the user to perform additional tasks to achieve the data as well as benefit from the data gathered. The problem in this scenario of engagement between the user and the gadget is that it requires several new habits to be absorbed by the user. Behavioral change is a tough task for any consumer good and the consumer good category is littered with niche products that failed to generate these behavioral changes long term. From the need to charge yet another battery driven gadget to uploading data, wearables ask a lot of the user in return for sometimes unreliable data tracking that can fail to sync with personal computing platforms and applications. The entire gadget and fitness goods category is littered with faddish products that were hot for a period of 1-3 years before failing to achieve mass market adoption and finding sales growth an impossibility. I suggested the behavior change needed by consumers as being an obstacle for wearables and the roughly 50% attrition rate for the leader in the category, Fitbit (NYSE:FIT), validates the subject matter as a concern.

The Watch, as I've said before, is a good product with many uses. Unfortunately, those uses are little more than redundant uses already expressed in other Apple products like the iPhone. Sales for the Watch have been strong from a sell-in perspective, but beyond poor from a sell-through perspective. Additionally, the return rate has been equally disturbing and highlighting Apple's poor positioning of the product. With an entry-level price of $349 for the Sport Watch models, the Watch has found sell-through results to be less than anticipated. The fact that the device does little more than the iPhone and that the Watch is tethered to the iPhone has found greater sales growth beyond sell-in to be challenging.

To address sell-through issues, Apple has permanently lowered the price of the Watch Sport to $299. This marks the second time the Watch has been discounted. With the next iteration of the Watch likely not coming until the back-to-school shopping season and alongside iPhone 7, the Watch will likely exhibit an average selling price (ASP) of $299 for the life span of the Watch since it launched in early 2015. This has forced some analysts to remodel the revenues coming from the Watch. Additionally, the discounted price of the Watch may help to clear some inventory overhang ahead of the next iteration while addressing competition from the Fitbit Blaze. The Blaze and Watch offer differentiated applications and can serve different consumers, but investors would be wise to understand that most wearables are used predominantly for health and wellness applications and therefore the products do compete head-to-head. If you buy an Apple Watch you are not likely to buy a Fitbit Blaze and that is the definition of completion. It's one or the other for the individual consumer using a wearable device.

I've been tracking sell-through of the wearables category for greater than six months now and the Watch is definitively performing poorly when compared to other wearables. When it comes to distribution that is where the Watch has received the greatest media notoriety. But when we consider what the sell-in/distribution reach could be for the Watch or Watch 2, one is forced to accept that it will continue to fail to reach mass-market adoption and lose market share to other smart watches and wearables. Simply put, the price point of the Watch is a factor that will eliminate many retailers from carrying the Watch. Staples (NASDAQ:SPLS) carries the Samsung Gear and other smart watches, but they will not carry the Watch as the price point is too high and the retailer does not desire to carry that price point in the category. Bed Bath & Beyond (NASDAQ:BBBY) carries the Fitbit Blaze, but will not be carrying the Watch because of the price point. And this is the case for many retailers not only in North America but also around the world. Apple Stores can't generate enough brand and sales strength in the face of greater distribution from competing devices, which has hindered the company's market share gains for other categories as well. Best Buy (NYSE:BBY) is Apple's largest sales volume generator for Apple products and as it pertains to physical store sales. Even this prime retailer of Apple products has found Watch sales hard to come by and returns of the device elevated.

The Watch is not a "beta test" product and neither was the iPod, iPad or iPhone. They are and have been what they always were for each product. Apple has definitively improved on each product mentioned, but there have been no magnificent changes to the usage of these devices. They have always been used in the same manner as their origins of engineering designed them to be. So when we think of the Watch of tomorrow, it may certainly be found to be an improvement form its predecessor models, but it is extremely unlikely to change how the consumer finds the product useful.

I'm looking forward to an "untethered" Watch, even though I don't think this will improve the sales performance of the Watch meaningfully. More than likely, it will be hindered by data usage subscription needs that are separate billings from smart phones and akin to the Samsung Gear. This has found sales of the Samsung Gear also troublesome. In short, any which way one tries to advantage the Watch, a hurdle is placed before it and when there are such obstacles it usually means the technology is either ahead of its time or not right for mass adoption. Adding Wi-Fi capability to the Watch also may hurt the margins for the product and further denigrate the battery life of the Watch. Both variables carry no advantage to Apple or the consumer. Brick wall after brick wall! Technological advances are not always advantageous for a company or its products. Such technologies are generally referred to as vapor ware, like 3D televisions. For all the hype and hope of 3D television in the home, the sentiment and sales wore off in less than two years. The products still exist, but only because selection is desired by retailers and not because sales are strong. 3D televisions are a nice niche. Keurig Kold is/was another example of vapor ware. Delivering an 8oz Coke Zero or Sprite for $1.29 at the push of a button for an appliance that cost $369 found very few adopters. The problems the Keurig Kold addressed were... nothing. The refrigerator does what the Keurig Kold does and stores 2-liter bottles at an average price of $1.40 per unit.

Akin to the Keurig Kold, the Watch and wearables in general don't solve any problems. They track data and alert the user to this, that and the other. But in no way do they solve problems. Additionally, like the Keurig Kold, there is a cost disadvantage to the competing form factor for tracking and alerting wearables users. This form factor is the cell phone or the user's five senses. Do you know how I know I might be obese? Do you know how I know I might need to exercise? Knowing my heart rate during any activity does nothing for the average person other than say, "By the way." I can't really do anything with that information on a repetitive basis without changing my behaviors. The practicality of changing those behaviors that doesn't conflict with my daily life is limited.

So with all that being said, here is a look at just how poorly sales for the Watch performed at one of Apple's largest retail distributors during the month of February and prior to the announced price reduction. I always use California, New York, Florida and Illinois when it comes to mass-market sales conclusions as historical sales data from these regions carries greater efficacy.

As far as pricing is concerned, the price reduction is addressing some of the sell-through issues with the Watch, but some retailers may believe the price reduction doesn't go far enough. Target recently promoted the sale of the Watch Sport for $249 in its most recent weekly circular.

The Watch is a good product that I hope Apple can find a way to improve upon for users going forward and in a manner that provides a long tailwind of revenues and profits for the company. The Watch presently makes up very little of the company's profits and as such investors should greatly consider the totality of the business when considering investing capital in the company. Over the last decade or so, Apple has proven to deliver products that consumers enjoy and in doing so investors have been greatly rewarded. With the company reporting earnings in the coming weeks, investors are anxiously awaiting to see how many iPhones and Mac products the company sold during the period alongside the gross profit margins. With the Watch relegated to the "Other" category of the company's revenue pie, I would still expect the company to detail distribution gains/sales for the Watch during the most recently ended quarter. With Watch finally achieving Best Buy Mobile distribution during the quarter, this probably helped sales of the Watch. Having said that, I do not expect the company to discuss sell-through Watch results in detail.

Disclosure: I am/we are long FIT.

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: My position in FIT is a trading position with cost average of $13.91 a share. I do not believe wearables will exhibit growth beyond distribution and as such I don't desire to invest for the long-term potential in the category or with shares of FIT.