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Apple's Luxury And Fashion Market Entry (Gold Watch) Vs Tech Obsolescence - I Don't Get It (Yet)

|Includes: Apple Inc. (AAPL)

I readily admit it: I still don't get Apple's likely pricing or general strategy for the most expensive Apple (Gold "Edition") watch variants, arguably Apple's first product entry into the fashion and luxury (accessory) market.

How much will it cost due to the use of gold and how much can Apple charge for it?

Apple certainly has a very strong brand name worldwide (in the global top 10 in many branding surveys) and the Watch is made of (solid !) 18k Gold. If we look at similar gold watches from traditional luxury brands, the Apple Watch will likely cost $5-10k or even more (I won't speculate, we will know in April 2015, $5k could be too low given the price of gold per ounce).

Apple will also create store-in-store concepts at luxury retailers (perception and brand image is important in luxury distribution). There are rumors that Apple will maybe even open dedicated smaller watch retail stores down the road, physically separated from current Apple retail stores. Many of the existing Apple stores may be too mundane (crowded) or in the wrong locations for the traditional luxury clientele.

So far so good, that's how luxury markets (and fashionistas) tick.

That's not the issue.

The problem is obsolescence in a few years since the Apple Watch still is a technological gadget at its core - not a traditional mechanical luxury watch that basically lasts forever and keeps up in value (or even increases its value thanks to watch collectors and scarcity. Limited editions and waiting lists are a well-known method for these brands to hike demand).

Maybe some readers have seen the following tag line in ads from Patek Philippe (arguably one of the most prestigious high-end watchmakers out there). The campaign suggests:

'You never really own a Patek Philippe. You merely look after it for the next generation.'

Source: www.patek.com/en/communication/news/prod...

For once, an ad tag line that is not lying.

Now, what about an Apple Watch selling for $5-10k or even more. Will it even sync with future iPhones in 10 years? What about the outdated chip? What about future apps no longer working? What about battery replacements?

I have already written about this potential issue in a recent AAPL article on SA, published the day before the Apple Watch was announced (and before I knew there even was a gold version):

  • Apple likely faces a key upper price barrier because of electronic gadgets' shorter lifespans compared to mechanical high-end watches. (Link)

Somehow this doesn't add up with some of the sales estimates and pricing rumors - Apple blogs like DaringFireball have speculated on unit sales numbers based on information from the WSJ:

Apple has asked its suppliers in Asia to make a combined five to six million units of its three Apple Watch models during the first quarter ahead of the product's release in April, according to people familiar with the matter.

Half of the first-quarter production order is earmarked for the entry-level Apple Watch Sport model, while the mid-tier Apple Watch is expected to account for one-third of output, one of these people said.

Orders for Apple Watch Edition - the high-end model featuring 18-karat gold casing - are relatively small in the first quarter but Apple plans to start producing more than one million units per month in the second quarter, the person said. Analysts expect demand for the high-end watches to be strong in China where Apple's sales are booming.

(...)

If Apple actually sells 1 million Edition units per quarter, and they sell for an ASP of $5,000, that's $5 billion in revenue per quarter - just for the gold Edition models. If the ASP is closer to $10,000, which I still think is possible, double that.

3 million Sport units at $350 comes to "only" $1 billion or so. 2 million stainless steel regular units with a $1,000 ASP would be an additional $2 billion.

So as a business - if the WSJ's sources are correct, and if Apple is correctly predicting demand - Apple Watch revenue will be dominated by the gold Edition units, accounting for double or more of the revenue from all the other models combined. The Edition models would thus do to the Apple Watch lineup as a whole what the iPhone, iPad, and Macintosh do to the entire phone, tablet, and PC industries, respectively: achieve a decided majority of the profits with a decided minority of the unit sales.

Source: daringfireball.net/2015/02/apple_watch_split

I think Apple's first run might last for more than one quarter. Second, the Edition (Gold) production percentage quoted in the WSJ strikes me as too high. I really think sales per month and per year were switched. Let's therefore assume that these gold watches will constitute only 1% up to 5% of all Watch unit sales.

For a quick comparison, Rolex, one of the best-known luxury brands in the watch space, sells under one million units per year (Source with more details: www.ablogtowatch.com/10-things-know-role.../ )

Even so, at 5% or less of total sales, the key question is how many customers will buy these gold versions fully knowing they will be technically obsolete in a few years? [1]

It's one thing to buy a mechanical timepiece that will retain most of its value after years or even decades, it's another to buy an Apple Watch at these price points - especially since Apple so far hasn't said anything about possible chip and battery upgrades for all Apple watches or at least for the gold versions.

In short, the reception, pricing and ultimate success of the golden Apple Watch remains a mystery to me for now - we shall see in April.

I will then (once we know details about high-end pricing and possible upgrade options for chips and battery, if any) post my Watch model estimates in the comment section below this blog entry.

The simple question is:

Will there really be millions of people (not just niche buyers, these do exist, see footnote 1) shelling out thousands of $ for a product that will be (technically) obsolete in a few years?

As a simple comparison, an expensive car will also be technically outdated, but you can still drive it in 10 or 20 years given proper maintenance. Same for a high-end mechanical watch. Both look and function very different to cheap cars or watches. Both product categories can even appreciate in value at the high-end (scarcity on purpose, limited editions for cars and watch collectors).

Not so for the Apple Watch. I doubt the first Apple Watch will even work with most apps or properly work with other Apple products in 10 years and beyond. (Try using the 2007 iPhone today or in 2017 for anything but basic functionality).

I simply don't get it yet - unless Apple unveils an update program (chips, battery) that enables the Apple Watch to at least "survive" a few generations.

The differences can amount to billions of USD in annual revenue, therefore this obsolescence question and the Apple Watch sales mix is important for AAPL shareholders.

PS: [1] Sure, there are "bling" smartphones like the ones from Vertu that sell for thousands of USD. Likewise, there are "bling" third-party mod services for Apple iPhones to have them encrusted with gold and diamonds. There will be similar luxury "mods" for Apple watches from small boutiques. But these examples are all niche products selling a few thousand units per week or month. Apple apparently wants to sell much larger quantities of the Gold Watch if the WSJ sources discussed above are even remotely accurate.

Disclosure: The author is long AAPL.