Setting the Stage for Two Million Apple Watch Demos in Two Weeks

Apple's relatively nimble retail footprint will play a crucial role in selling Apple Watch. Mark Gurman over at 9to5Mac reported yesterday that Apple is planning on setting up Apple Watch demo areas where 10 customers can receive personalized 15-minute demos. I suspect a decent number of Apple Watch pre-orders will likely take advantage of Apple's offer, and get a demo/fitting, since choice and comfort are important watch elements. It is conceivable that over the two week preview period starting April 10th, including launch day, Apple will be able to give more than two million Apple Watch demos, which will not only help drive a successful product launch, but begin the process of explaining the device to hundreds of millions of customers. 

The Apple Watch will launch in nine countries (a record for a new product category launch):

• US (265 Apple retail stores)
• UK (38 stores)
• Canada (29 stores)
• Australia (21 stores)
• China (18 stores)
• France (18 stores)
• Germany (14 stores)
• Japan (8 stores)
• Hong Kong (3 stores)

The only countries to have more than three Apple retail stores and not make the initial launch list are Spain, Italy, and Switzerland (no surprise there). It would seem obvious that Hong Kong's proximity to China was a much more important factor than store count. Therefore, the Apple Watch launch country list is essentially the top countries within the Apple retail network, reinforcing the idea that Apple is positioning the demo as key to selling the device. 

Exhibit 1 takes a look at the number of Apple Watch demos that I estimate could be given at each Apple retail store per hour, starting at 40 for the typical small Apple store in a mall to over 150 for a hi-profile store. The various store types are based off of store footprint estimates from Gary Allen of ifostore. Gurman's report indicated each store will receive one Apple Watch demo table, with the ability to have more tables dependent on demand. I am assuming some medium/large Apple stores in mall and non-mall locations will indeed get additional demo units (reflected in the 1.5 Apple Watch demo table figure in Exhibit 1), while hi-profile stores get four tables to handle higher demand. 

Exhibit 1: Theoretical Number of Apple Watch Demos by Store Type

Exhibit 2 takes the per store data from Exhibit 1 and expands it for the entire preview period across the retail footprint. It is conceivable that Apple will be able to give 22,000 Apple Watch demos per hour, leading to nearly 180,000 demos a day and over one million demos a week. Of course, school and work patterns during the week will likely result in Apple giving fewer demos than these totals, but the takeaway is Apple's built-in capacity for giving such a large number of demos. During the entire preview period from April 10th to April 24th, including launch day, Apple may be able to give upwards of two million Apple Watch demos. 

Exhibit 2: Theoretical Number of Apple Watch Demos by Store Type During the Preview Period

Earlier this week, I established my Apple Watch sales expectations, including a 2.5 to 4.5 million unit sales estimate range for opening weekend. I feel more comfortable that Apple will be able to ship at least one to two million units for opening weekend as consumers will have had the opportunity to experience the watch during a demo and place an order. My estimate then assumes additional sales from in-store demos on launch day.

Many observers are underestimating the impact that a 15-minute demo will have on selling Apple Watch. Those interested in an Apple Watch will likely already own an iPhone and be familiar with the Apple ecosystem. The sales pitch will not look to answer "why Apple?" but instead focus on "here's what you can do with this watch." That message is difficult to get across in traditional advertising, so the ability to offer an in-store demo and control the entire sales message, will go a long way in selling Apple Watch to these early adopters. 

The importance of a demo and the broader sales environment can also be seen from the way Apple Watch is displayed in stores compared to that of an Android Wear smartwatch (shown below). Apple's "glass-topped Apple Watch display cabinet, accessible to staff from below, via a descending, motorized flap, like the ramp at the rear of a cargo plane," as Ian Parker described it in his Jony Ive profile published last month, helps to build an experience around the device that will go a long way in nurturing desire. Simply opening retail stores is only the beginning in being able to create the right kind of atmosphere that is conducive to brand building and strong sales on a square footage basis. 

Apple retail was one of the key reasons that the iPad became a phenomenon. Once customers held the device, and were able to experience software that allowed the hardware to melt away, the sale was made. I have a feeling the same will occur with Apple Watch as the demo will go a long way in turning interest and curiosity into a sale.

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Apple Watch Sales Estimates (Video)

With an aggressive nine country launch into a user base of more than 400 million iPhone owners, the Apple Watch will likely represent the largest new product category launch, according to sales, in Apple's 38-year history. 

Apple Watch topics discussed in this video include: opening weekend sales, 2015 and 2016 sales outlook, ASP and sales mix, and the overall impact on Apple revenue and EPS. 

The full report can be found here.

Apple's Plan to Rethink Television

Television is broken. The era of smartphones and tablets continues to alter the way we consume and interact with video content. While video watching was once a sedentary behavior with little in the way of third-party distraction, video is now increasingly consumed throughout the day across multiple screens. Yesterday, the WSJ reported that Apple is looking to launch a service that repackages a certain amount of television channel programming into a more appropriate form for the mobile era.  Apple has likely earned the benefit of the doubt that such a service would be worth people's time and money. However, ultimate success with rethinking television will be dependent on ignoring the mirage of simply getting television content broken out into more granular form sent over the internet. Apple will likely head in a new direction where all video creation is embraced and distributed through curation and personalization. 

The primary issue concerning television isn't that there is too much content being delivered to our homes. Instead, televisions's fundamental problem is that it doesn't include the wide variety of new content born out of mobile. While our smartphones may have changed the way we consume content, the ability to record and capture almost anything in the world with little in the way of time or money commitment has changed the way content is created. Channel surfing on a large screen television has been replaced by YouTube surfing on a computer or smartphone as well as consuming video content from shared links on Twitter and Facebook. Short video clips, which at first seemed more like a gimmick, are increasingly containing more in the way of news and information than many would never have imagined. "I saw it on Vine" is increasingly becoming a more common phrase than "I saw it on CNN." Such a shift in content consumption and creation from many of the "old" players to a new breed of content companies reinforces the need for Apple (and any competing service interested in rethinking video) to start anew and build a service that combines both the old and new content creators. The strategy would be strengthened by the concepts of mobile, decentralization, and differentiation. 

Source: Above Avalon

A truly revolutionary video streaming service would include all video content, relying on curation and personalization to deliver an engaging user experience. 

It is reported that Apple's Plan A for rethinking television was to take a page from the iPhone playbook and work with a key partner, in this case, Comcast. In such a scenario, there would be room for both parties to win as consumers ultimately pay more for a better product. However, due to continuing setbacks and roadblocks, Apple may indeed be looking now at Plan B, a more hostile plan involving TV programmers including ABC, CBS and Fox. It is not hard to see Apple's ultimate goal to create a service that includes various "channels," or maybe a better word would be "video lengths," that provides easy access to different video content mediums. Getting the "old" players involved would be the first step on a long journey. All of this may indeed be too utopian as various parties may not want to go down the iTunes/music industry path where Apple holds too much control.

Apple's rumored scaled back TV network bundle would reportedly cost $30-$40 a month. Add this cost to Netflix's or Hulu Plus's monthly rate and a user's monthly bill is once again approaching $50 a month for what essentially comes down to traditional cable, repackaged. A whole other side of the video equation is still missing: the new players. While apps on an Apple TV may suffice for some, a suboptimal user interface and the much bigger implication on video consumption behavior stand out as barriers that would need to be overcome. Unsurprisingly, cable companies aren't as clueless as many think and are in a great position to begin increasing internet-only prices following a customer's awkward "I no longer want to pay for cable" call to customer service. In addition, companies such as Netflix and Amazon are using video content as bargaining tools to enrich their own platforms and sales pitch to consumers in an ultimate desire to buy relevancy in people's lives, no matter how small the window (or screen) may be. Walled gardens built around established social networks don't scream ease of use and interconnectivity either.

In a perfect world, I would use a streaming video content service that has had some element of curation applied, resulting in a completely new experience that would be the linchpin of dropping my cable plan. Add elements of search, discovery, and social media and this hypothetical video service would combine elements of yesterday in the form of push content such as live sports, news, and tentpole events like the Oscars and in addition have the ability to pull content from vast libraries, similar to what can be found on Hulu. Some type of classification and delivery system based on video length and subject matter represents interesting possibilities for how a smartphone user can consume a wide selection of video content. Apple's role in such a product would be to serve as a gatekeeper, providing differentiation through curation and discoverability. If this sounds similar to the music streaming strategy Apple will likely utilize, it is because they both would rely on the same themes of providing a better user experience through the way content is consumed by the end user. The entire iOS ecosystem is involved in taking advantage of streaming content services.

The most challenging barrier to overcome before seeing this new video era is related to business and economics. Combining content built on a very specific method of revenue (fees and advertisements) with new era content that may not have set parameters around monetization makes it that much more difficult to truly combine everything into a easy, digestible format. Not to mention, the sheer number of licenses and rights that would need to be obtained would make the weak of heart feel overwhelmed. Add in complexities of international expansion, and bringing services like Apple Pay to additional countries would look like a walk in the park. 

An Apple streaming video service would do more to increase the value obtained from iOS devices that truly represent mobile, including iPhone and Apple Watch. 

What may have initially been considered another leg on the stool, rethinking television for Apple is increasingly looking more like a much broader video service with the goal of increasing the value of the Apple ecosystem, similar to Apple Pay and Apple's upcoming music streaming service. By building additional functionality and usage into the ecosystem, Apple is continuing to go down the path of addressing key elements of our life that can be controlled, or improved, by iOS devices.

While there is no doubt that Apple has various sizes of glass in the labs, including large screens bigger than an iMac, the value from a video service may inherently be found in smaller screens and devices, including iPhone and Apple Watch. To truly rethink television, Apple needs to address the much harder task of figuring out the best way to consume content born from the modern day video renaissance. 

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Establishing Apple Watch Sales Estimates: Expecting a Big Launch

With an aggressive nine country launch into a user base of more than 400 million iPhone owners, the Apple Watch will likely represent the largest new product category launch, according to sales, in Apple's 38-year history. Given my opening weekend sales expectations, the Apple Watch launch may be upwards of 12x as large as the iPad launch. I am establishing calendar year 2015 and 2016 Apple Watch unit sales estimates of 19 and 33 million, respectively.

Apple Watch is a different kind of product for Apple with 30 unique watch models curated into two collections, not including eight Edition models that will have a limited release. While I would still expect initial sales to be constrained by supply, the somewhat wide launch window (Australia, Canada, China, France, Germany, Hong Kong, Japan, the UK, and the US) suggests Apple is confident in an opening weekend unit sales number that is at least 2 million, but not likely more than 5 million. Exhibit 1 compares Apple's previous new product category launches. The Apple Watch's nine country launch stands out as an outlier. 

Exhibit 1: Apple's Recent New Product Category Launches

Opening Weekend Sales

I am establishing a 3.5 million opening weekend sales estimate based primary on the list of launch countries and what I consider to be a realistic amount of available supply. It remains to be seen what supply will look like on launch day at Apple retail stores for those who don't preorder online. I expect many to take advantage of Apple's preview window to try out their watch selection after pre-ordering the device. Exhibit 2 highlights my expectation range for opening weekend sales with a wider expectation range of between 2.5 and 4.5 million units. 

Exhibit 2: Above Avalon Estimate for Apple Watch Opening Weekend Sales (millions of units)

It is important to note that Apple may not release Watch unit sales numbers related to opening weekend or quarterly results. Management had indicated that Watch revenue would be combined with "Other Products" for reporting purposes, which includes Beats headphones and speakers, iPod sales, Apple TV, and peripherals and accessories for iPhone, iPad, Mac and iPod. There may still be a possibility that Apple discloses overall unit sales numbers if they are strong. 

Unit Sales Estimates

Back in November 2014, I published my initial estimates for Apple Watch sales. Since then, I have not discovered any new information that significantly altered my view. Exhibit 3 contains my Apple Watch unit sales estimates for 2015 and 2016. It is important to note there are a number of different holding periods discussed in the press related to Apple, primarily calendar year (CY) and fiscal year (FY). Apple reports earnings according to its fiscal year. 

Exhibit 3: Above Avalon Estimate for Apple Watch Unit Sales

Watch production will likely represent the biggest bottleneck for stronger initial sales. Since the Apple Watch will launch in nine countries, it would seem that Apple is confident supply would at least be large enough to support such a wide release for a first generation product. Within the nine launch countries, Apple's retail network will play a crucial role as hands-on demonstrations and previewing may be desired by a sizable portion of potential buyers. I assume the gradual rollout to other countries will take months, with the product likely to reach an iPhone-like distribution sometime in 2016.

With a target market of approximately 400 million iPhone users, I continue to view initial Apple Watch demand will be determined by a consumer's interest and passion with Apple products. Those individuals who have a long history of owning Apple products, and are interested in having the latest and greatest, will likely be first in line, while individuals who may be new to iOS and likely just getting use to their iPhone may not even consider buying an Apple Watch in the first few years. My previous note on Apple Watch sales estimate suggested that 15% of the iPhone user base (approximately 60 million) represents early adopters, the ones likely to buy the product early in the life cycle. With that in mind, 28 million unit sales during the first 12 months on the market would seem relatively plausible. 

As shown in Exhibit 4, I am establishing a sales mix estimate that favors the Sport collection over the Watch collection. I relied on a combination of an opt-in Twitter survey that I conducted with early adopters, adjusted to reflect non-English speaking countries and more mainstream buyers.

Exhibit 4: Above Avalon Estimate for Apple Watch Unit Sales Mix for 2015 and 2016 (CY)

Average Selling Price (ASP) Estimates

Taking into account the sales mix, as well preferred watch face sizes and styles, Exhibit 5 highlights my estimate for Apple Watch ASP. Band revenue represents approximately 5% of Apple Watch Sport collection, while I would expect bands to represent a larger portion of Watch collection sales (8%). 

Exhibit 5: Above Avalon Estimate for Apple Watch ASP

Revenue, Operating Income and EPS Estimates

Combining unit sales estimate with ASP, Apple Watch has the potential to bring in $8 billion of revenue in fiscal year 2015, which would be around 3% of Apple's total revenue. In 2016, Apple Watch has the potential of representing close to 7% of Apple's revenue. In terms of EPS, Apple Watch may represent up to $0.44/share for 2015, increasing to $1.13/share (12% of total EPS) in 2016. While the iPhone's popularity overshadows many of these strong Apple Watch estimates, one aspect to keep in mind is the Apple Watch would likely represent the second biggest product in terms of revenue and profit momentum. The iPad and Mac show no signs of similar levels of growth monetum.

Exhibit 6: Above Avalon Estimate for Apple Watch Financials (FY)

Going forward, I would label Apple Watch and iPhone as the two priorities at Apple in terms of products with both sales and structural (mobile and wearables) momentum. The ingredients are in place for a strong Apple Watch launch. 

This report was produced by Neil Cybart on March 16, 2015 and is not meant to be used as investment advice. I publish a daily email about Apple called AAPL Orchard. Click here for more information and to subscribe. 

The MacBook Paradox

The new MacBook is quintessentially Apple. Everything from the reimagined keyboard and butterfly mechanism to the new Force Touch trackpad and reconfigured battery, the new MacBook represents Apple at its finest. Years of hardware engineering culminating in a product that literally pushes the definition of the product category it has resided in for close to a decade. 

However, despite representing classic Apple, the new MacBook is inconsequential to Apple's bottom line. Even in a best case scenario, the new MacBook would struggle reaching 5% of Apple's operating income. As more portable (and cheaper) alternatives, mainly in the form of iPhone, continue to replace the need for laptops and desktops, the Mac's overall influence will continue to decline.

A paradox is formed as this product that best represents Apple (even down to the way it is introduced to the public by Phil Schiller), is increasingly playing a smaller role in Apple's future. This paradox represents one of Apple's long-term risks. If Apple is faced with supporting a growing list of still-loved, but increasingly inconsequential, legacy products, will Apple be able to completely focus on the future? The iPod turned out to be a blessing in disguise as the product line ran its natural course, peaking in 2009 and then steadily declining to an asterisk on the income statement.  In the future, Apple may not be so lucky, and instead have legacy products with a much longer life cycle where sales remain too high to completely ignore, but too low to move the financial needle. 

In the near-term, this risk appears to be dormant.  Apple is able to effectively focus on a narrow product lineup that still fits on one of Jony's infamous design studio tables. We will continue to see innovations with the Mac and iPad, while the iPhone and Apple Watch become a bigger piece of Apple's future plans. Tim Cook and company constantly talk about being paranoid about competition. I suspect this MacBook paradox also registers with management as something to keep them up at night. The fear is that one day Apple may unknowingly find itself chained to the past, unable to completely focus on the future for too many resources are being spent maintaining products from yesterday. 

There are signs that Apple is aware of, and taking steps to alleviate, this risk. Management's claim that they don't think about money when creating products is exemplified by not only the new MacBook, but also the low-margin iPad mini and the lack of a large screen iPhone until 2014. By simply focusing on making, and shipping, great products, the impact a product may have on the bottom line does not represent the main driver behind management's decisions. 

One of Apple's secrets has been doing very little in order to put all of its attention and resources on a few, big things. For that to continue, Apple may need to make the tough decision to stop updating product lines earlier than would otherwise be the case. Apple may continue to be lucky and have products follow the iPhone/iPod path, where new products cannibalize old products in an orderly fashion. Navigating the MacBook paradox may one day represent a tough task for Apple, but with challenges come opportunities, and in the near-term, management will marvel at the new MacBook for a few days before moving on to the next big thing. 

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