Apple's wearables platform is gaining momentum. According to Apple's most recent earnings and management commentary, the company sold more than five million wearable devices last quarter. When combined, Apple Watch, AirPods, and W1 chip-enabled Beats headphones are now outselling Mac in terms of unit sales. More impressively, Apple wearables are tracking ahead of iPhone in terms of unit sales out of the gate. As competitors continue to approach wearables with caution, Apple is doubling down.
Apple's Wearables Platform
Apple's wearables platform consists of three product categories:
- Apple Watch. Launched in April 2015, Apple Watch is Apple's first wearables device. After reconfiguring the Apple Watch line this past September, Apple now sells five Watch models ranging from a $269 Apple Watch Series 1 to a $1,499 Apple Watch Hermès. To date, Apple has sold 25M Apple Watches (my estimate).
- AirPods. AirPods are much more than just a pair of wireless headphones. The inclusion of Apple's new W1 chip, along with a series of sensors and voice accelerometers, position AirPods as Apple's second major wearables product. Despite launching with very limited supply in December 2016, Apple has managed to ship at least three million AirPods (my estimate) in a little more than three months on the market. This amounts to $475 million of revenue in just the first 14 weeks on the market.
- Beats headphones. The inclusion of Apple's new W1 chip means three Beats headphone models (BeatsX, Solo3, and Powerbeats3) should be classified as Apple wearables. The expectation is that these headphones will gain additional features in subsequent versions.
Apple launched a wearables platform with Apple Watch two years ago in April 2015. Apple has since expanded the platform to include devices for the ears (AirPods and Beats headphones). As Apple unveils new wearable devices and form factors, those products will expand the company's wearables platform.
There has been an intense debate involving wearables and how to define sales success. The best way to begin addressing the issue is to go over the sales numbers. As seen in Exhibit 1, Apple Watch and iPhone have been trending similarly when we look at sales out of the gate. When looking at the first two years each product was available in the market, we see that both Apple Watch and iPhone are outpacing early iPod sales by a wide margin.
Exhibit 1: Early Sales Trends (Two Years Following Launch)
Rearranging the data from Exhibit 1 into cumulative unit sales removes the seasonal impact. It becomes easier to see how Apple Watch and iPhone are running neck-and-neck for second best-selling Apple product category across the first eight quarters following launch. The fact that Apple has sold nearly the same number of Apple Watches as iPhones during the first two years on the market will surprise many people. The narrative surrounding Apple Watch does not match that of a product very close to being the second best-selling product out of the gate in Apple's history.
This past quarter marked the eighth quarter that Apple has been selling a wearable device. When AirPods and Beats headphones unit sales are added to Apple Watch sales, the true extent of Apple's wearables platform becomes apparent. Apple's total wearables sales are outpacing iPhone sales out of the gate. As seen in Exhibit 2, AirPods and Beats headphones sales boosted Apple wearables sales in the seventh and eight quarters following Apple's wearables platform launch.
Exhibit 2: Early Sales Trends (Two Years Following Launch)
On a cumulative unit sales basis, Apple wearables sales are exceeding iPhone sales by two million units after the first eight quarters on the market. Wearables are Apple's second best-selling product category out of the gate.
Whenever sales comparisons are made between Apple wearables and iPhone and iPad, there are a number of key differences between the product categories that need to be discussed.
iPhone. In 2007, Apple launched the iPhone with very limited distribution. For the first four months, iPhone was only available at AT&T in the U.S. By time the iPhone 3GS launched in 2009, the iPhone was available in 80 countries. The iPhone's limited distribution masked the product's underlying adoption trends. During those first two years on the market, consumers began to see value in a hand-held computer. This makes it impossible to know how well the first iPhone would have sold if it was given a much wider launch. It took a few years for the mass market to become interested in iPhone.
iPad. The iPad launch was timed perfectly and enabled the iPad to ride the iPhones' coattails. The iPhone app bonanza certainly contributed to iPad sales in addition to the fascination found with much larger multi-touch screens running iOS. While the iPad saw a limited rollout at launch, distribution was much wider than it was with the iPhone launch a few years earlier.
Apple Watch. Despite Apple Watch seeing a much wider rollout at launch, the product has faced a different kind of constraint. Apple Watch requires an iPhone. This has the effect of more than doubling the entry-level price of Apple Watch for non-iPhone owners. Even though the Apple Watch was available in nine countries, including China, at launch, the product's target market was closer to 500M people.
AirPods. AirPods launched this past December in more than 100 countries. Exhibit 2 adds AirPods sales to Apple Watch and Beats headphones sales beginning in the sixth quarter following Apple's platform launch. This ends up adding quite a bit of conservatism to Apple wearables sales as AirPods will likely be on an annual sales pace measured in the tens of millions per year by time they have been available in market for eight quarters. As long as supply improves, AirPods will likely give the iPad a run for its money in terms of it being the best-selling Apple product out of the gate over the first two years. (The methodology and math behind my AirPods sales estimates are available for members here.)
One takeaway from all of these launch and distribution differences is that each product has faced its own set of unique situations and challenges. However, there is value found in comparing sales of wearables to those of early iPhone and iPad because such comparisons provide context for wearables sales.
Many people have been grading Apple wearables on a curve, looking at the devices through an iPhone lens. Since unit sales pale in comparison to current iPhone unit sales (220M a year), wearables are being cast off as either disappointing or irrelevant. This ignores what is growing momentum for Apple's wearables platform.
To have Apple wearables sales outpace iPhone sales out of the gate when looking at the first two years of availability demonstrates that wearables are a thing. Apple has built and sold more wearables than iPhones after the first two years in the market. That fact goes a long way in helping to define just how significant Apple wearables sales have been. It is irrelevant if Apple could have shipped additional iPhones by launching with wider distribution back in the late 2000s. An argument can be made that Apple would have sold many more wearables this past quarter if it wasn't for severely constrained AirPods supply.
Too much attention is being placed on Apple Watch as holder of the wearables torch. Instead, the focus needs to be placed on both Apple Watch and AirPods, with W1 chip-equipped Beats headphones representing Apple's third wearables product category. Instead of looking at these wearable devices as standalone products with few similarities or overlap, we should view them as coming together to create a platform, as shown below. AirPods usage increases the value found with Apple Watch ownership. The reverse applies as well. Apple Watch usage increases the value found in AirPods ownership. This interdependency is only going to intensify and likely boost overall Apple wearables sales.
According to my estimates, Apple is on track to sell more than 30M wearable devices in 2017. This is an astounding figure considering that it would represent approximately 15% of the number of iPhones Apple is expected to sell in 2017. As seen in Exhibit 3, there is a strong probability that Apple wearables sales will continue to outpace iPhone sales when looking at the first three years of availability following launch.
Exhibit 3: Early Sales Trends (Three Years Following Launch)
Looking out a bit further to the first five years of availability following launch, things become even more interesting. The iPhone began to outsell the iPad three years following launch, and the sales gap has increased ever since. Similarly, Apple's wearables platform is positioned to outsell iPad in roughly the same amount of time following launch. It is not out of question that Apple wearables will continue outpacing iPhone as we move to four years of availability following launch. While this is no small task as Apple would likely need to double the number of wearables it is currently selling, AirPods would play a key role.
Exhibit 4: Early Sales Trends (Five Years Following Launch)
This past holiday season, Apple passed Fitbit to grab the title of largest wearables company. This past quarter, for the first time, more Apple Watches than Fitbit devices were sold. The number of people wearing an Apple wearable device has likely surpassed 20M. Apple is laying the foundation for a wearables platform that will eventually grow to annual unit sales in the hundreds of millions of devices.
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