The New Apple: Embracing Personalized Technology with a Luxury Twist

While it may seem like we have everything figured out about mobile with the iPhone form factor now cemented in our daily lives, in reality, we are in the early stages of the current mobile renaissance. Consumers are still trying to figure out what sizes of glass should be carried in our pockets or worn on our bodies. Despite all of these changes, there is one theme that has remained unwavering: technology is becoming more personalized. With Apple Watch, Apple is placing a big bet that a device for the wrist is the next progression of personalized technology, which inherently adds an element of luxury and fashion to the mix. Yesterday's Apple Watch keynote wasn't perfect, but management took the opportunity to tweak its marketing message a bit with the goal of positioning the Apple Watch as the newest, most personal device in the iOS product portfolio. The Apple Watch has the potential to be positioned as the primary interface for mobile computing.

Unchartered Territory

If there was one moment of the Apple's "Spring forward" keynote that should stand out it occurred at the 52-minute mark. Up to that point, the presentation was classic Apple. After a little bit of Apple TV news, Jeff Williams introduced a new health research platform that came across as something only Apple would be able to do, and Phil Schiller was up on stage, gleefully explaining why the new MacBook was the best Mac ever imagined. For the first 52 minutes of the event, Apple was at its best, and it showed. When the discussion turned to Apple Watch, Tim Cook and Kevin Lynch spent the next 42 minutes talking about all of the things Apple Watch can do, but the presentation lacked the same level of cohesiveness that was found in the beginning slides. Cook awkwardly worked through the Christy Turlington Burns storyline, which gave off a bad late-night TV talk show vibe. One could sense that the Apple Watch and all of the inherent fashion and luxury surrounding the product is new territory for Apple, and it may very well be more of a "learn as you go" mantra when it comes time to explain the device to the world. 

Less Details, More Insight

A prime example of Apple still playing around with how Apple Watch should be marketed was how Apple chose to bypass any mention of the Digital Crown.  Back in September, Tim Cook literally introduced the Apple Watch to the world as a device dependent on a breakthough user interface based around the Digital Crown. The Apple Watch borrowed much heritage from a classic watch crown but altered its functionality to essentially be the "pinch and zoom" of the Apple Watch. Jony Ive was quoted in the press about all of the painstaking effort put into coming up with the Digital Crown. Yesterday, the only reference to the Digital Crown was said in passing by Kevin Lynch who mentioned "crown" a few random times during his demo. Such a change in marketing didn't quite stop there as Apple seemingly avoided discussing much of the mechanism dealing with Apple Watch buttons, menus, and swipes. There was also little to no discussion around the device specifications, similar to what Phil Schiller had just finished doing with the MacBook. The Watch is different, and Apple treated it accordingly.

Not coincidentally, reviewers' initial thoughts about the device after 15 minutes of demo time seem to center around the watch feeling a bit complicated to use. There may be a learning curve involved with Apple Watch, and management decided to spend less time talking about those details and more time talking up apps and things that would increase someone's interest in the device. The strategy would seemingly involve Apple Retail to help get people comfortable with the new user interface. Apple did announce there will be an opportunity to preview Apple Watch at Apple Retail stores, which will likely involve a quick overview of the device. We have experienced very few breakthrough user interfaces since the mouse, so maybe our sense of perspective and expectations for ease of use is a bit skewed by the sheer intuitiveness of multi-touch?   

Bringing iOS to the Wrist

Some criticism that was thrown towards Apple after the first Apple Watch event in September was that there wasn't a clear reason given for why someone should buy an Apple Watch. Even after yesterday's keynote, there likely were many disappointed pundits awaiting Apple's clear bullet by bullet list for why the Apple Watch is worthy of someone's wrist. In reality, however, Apple explained in not so clear language why Apple Watch makes sense: it brings technology much closer to the user. Similar to the way the iPhone and iPad seemed magical next to laptops and desktops, having a device that is on the wrist, a location with superior line of sight and proximity to the face, may bring new ways of using technology. 

Apple could have explained the device a bit better in context of the full product lineup, as shown below. If one was to go back to Apple's previous keynotes, Tim Cook eloquently explained the following slide that was in yesterday's presentation.

Exhibit 1: Apple's Current Primary Product Lineup

Instead of relying on antiquated consumer/professional product matrixes, Apple's product strategy can be described by a personalization analysis, included in Exhibit 2. It is clear where the Watch fits into the mix. 

Exhibit 2: Apple Personalization Product Analysis

In terms of selling the Apple Watch to consumers, Apple, as expected, relied on a soft sell approach by merely listing various apps that I would suspect were heavily favored and used by Apple employees that got to test the device over the past few months.  While some may have poked fun at the thought of using Instagram on a watch, one would hope Apple obtained valuable input from employees indicating photos on a wrist had some intriguing value to them.

The overarching theme of Kevin Lynch's Apple Watch demo was about iPhone substitution. While many of the Watch app demos fell a bit flat due to the personalized nature of both the app and the device, a close listen to Kevin Lynch's dialogue would be very revealing. If audience members closed their eyes, it would have sounded like Lynch was talking about a new iPhone. Not only did he discuss things that were known to be watch-focus activities, like notifications and messaging, but nearly every app discussed was a popular app on iPhone. Lynch made his ultimate rationale for owning an Apple Watch clear when he said he would want to leave the phone by the door and just use the watch around the house. I suspect there are very few people who really think of Apple Watch as this versatile.

Personalization Allows Luxury 

As personalization permeates through mobile technology, one of the more interesting consequences is how luxury is inherently intertwined in the discussion. Since Apple Watch is a device meant to be worn, Apple was correct in assuming people would want the device to represent their personalities and styles. Apple is selling Apple Watch to everyone from high school students to senior executives with a keen fashion sense (although some still seem opposed to Apple's fashion sense). As the level of exclusivity increases, an item is able to display more characteristics of luxury, as shown in Exhibit 3.  Moving along the independent axis, supply begins to decline, an often necessary ingredient in luxury markets. Compare a flagship iPhone model that ships hundreds of millions of units per year to a personalized Apple Watch Edition with limited supply. The iPhone will simply not contain the same potential as the Apple Watch to be regarded as a luxury item. Critics would point out that there is plenty of emotion that enters the equation when analyzing and referring to something as luxury. Nevertheless, the general idea behind Exhibit 3 still stands. 

Exhibit 3: Exclusivity vs. Luxury

The interesting aspect of Apple embracing luxury is that Apple inherently has the ability to add even more personalization in the form of software, but it may be best to assume the luxury markets treat that with some level of doubt. While the first version of Apple Watch may not push the boundaries of what is possible with customized technology, future reiterations, including various other devices, would certainly beg the question of what the limit is to Apple's luxury motives. Exhibit 4 shows the various Watch collections graphed according to price. It is easy to see that at least on paper, Apple is relying on scarcity ("exclusivity" sounds better for marketing) in order to drive prices higher. 

Exhibit 4: Apple Watch Prices by Collection

Threading the Luxury Needle

One of Apple's primary goals yesterday was to transition to a premium mass-market luxury brand. Even though Apple has mastered the art of selling mass-market goods at premium prices, catering to a luxury clientele comes with new risks, including alienating core users who may be turned off by management's focus on the high-end at the detriment of the "low-end." Apple handled the transition well by offering clear distinctions between the three tiers (aluminum for Sport, stainless-steel for Watch, and 18K gold for Edition). Tim Cook's presentation of the Edition pricing (no stated pricing on a slide and no video depicting the gold) suggested there will be a very clear difference, or segmentation, between how the Edition is sold compared to the other two tiers. There will likely be very few instances of $349 Apple Watch Sports being sold next to $17,000 Apple Watch Editions. 

Pricing Looks Right; Sales Potential Remains Elevated

Apple is selling the Sport and Watch collections for a reasonably fair price with premium mass-market in mind. The Edition pricing reflects not only the 18k gold but also artificial scarcity with limited production. The initial target market for Apple Watch is approximately 400 million iPhone users. If one were to simply look at iPhone 6 and 6 Plus users as a closer barometer of likely Apple Watch purchasers, the market is now greater than 100 million users. It is important to remember that many consumers do not buy the first version of a product for a multitude of reasons. Therefore, most people will not buy Apple Watch in 2015, or even 2016. With that in mind, I still feel confident in my estimate of 17 million units sold in 2015 with another 35 million units sold in 2016. If looking at sales in terms of months of market, for the first 12 months on the market, Apple will likely sell around 25 million Apple Watches. Beyond 24 months, sales may be a bit more difficult to forecast as it is unclear what the Watch upgrade cycle looks like. Apple has indicated the battery can be swapped out, and some of Jony's recent comments would suggest there may be a scenario where the watch face doesn't change much from year to year. 

Expanding the Personal Experience

The primary takeaway from Apple's keynote yesterday was that the iOS product family is expanding as a watch takes up the spot of the most personal device Apple has ever made. The watch holds the potential of becoming the primary input for mobile computing, serving as the assistant that people thought Siri on iPhone was going to become. Meanwhile, the iPhone's relevancy doesn't necessary decline in an Apple Watch-focused world. Instead, the iPhone continues to gain power and capabilities from both the iPad and Mac. The Apple Watch has the potential to overpower iPad in terms of popularity and usage. The device's upgradability is the primary unknown as to whether unit sales will indeed surpass the iPad. However, odds look to be in the watch's favor.  

Apple's main selling strategy is to get consumers into an Apple retail store and in front of a watch. It is somewhat similar to the way the iPad took off once people played with one. The obvious difference is that it is much harder to "play" with an Apple Watch in an Apple retail store, and it will likely require an appointment. 

Apple is coming up with various devices that each serve a different function, letting the user interact with technology in a few unique ways. Going forward, I suspect the iPhone and Apple Watch will garner the most attention while the Mac is positioned as a product for higher power computing needs. By entering into wearables, Apple is getting its first taste of personalized technology built around accessories (bands) and luxury. The key question going forward is what will Apple learn from this process (both in terms of manufacturing and sales) that can be applied to future Apple Watch editions as well as other wearables? For Apple, the Watch is one way to play a much more significant role in an iPhone user's life. 

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