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Apple Watch: A Disruptive Innovation or a Chink in Apple's Armor?

ABSTRACT

This case is about Apple Inc.’s (Apple) foray into wearable technology with the launch of the Apple
Watch, a smartwatch that introduces an entirely new way to receive information and interact with
the world through third-party app experiences designed specifically for the wrist. The Apple Watch is
the first new product category in Apple since the iPad and the first product to be developed under the
leadership of CEO Tim Cook (Cook). Despite being a late arrival in the wearable market, Apple claimed
the top spot in terms of device sales as it accounted for over 50% of smartwatch sales in 2015 and
sales have nearly doubled since 2016. Even though the first-year sales of the Apple Watch eclipsed
the first-year sales of both the iPod and the iPhone, the smartwatch has been dogged by unrealistic
expectations, which positioned it as the next iPhone in terms of sales and popularity.

The product has not been living up to expectations as a large part of the Watch’s functionality is tied
to that of an iPhone. Post two iterations, the Apple Watch had not proven to be as indispensable as
the iPhone or even as profitable as the Mac or the iPad. The biggest challenge for Cook going forward
would be to hold on to the Apple Watch’s massive market share in the fairly tepid global smartwatch
market. It remains to be seen whether the Apple Watch can become a game-changing device that can
transform the wearable tech market just like the iPhone changed the smartphone industry.

INTRODUCTION

Apple, Inc. (Apple) became the world’s #1 wearables vendor in Q1 2017 with an estimated 3.5 million
Apple Watch shipments, 59% higher than the shipments in the same period the previous year,
according to research firm Strategy Analytics . Apple captured 15.9% of the global wearables market
share, overtaking market leader Fitbit Inc. (Fitbit), which shipped an estimated 2.9 million wearable
devices during the quarter. Neil Mawston, Executive Director at Strategy Analytics, said, “Apple
captured 16 percent global market share and overtook Fitbit to become the world’s largest wearables
vendor. The new Apple Watch Series 2 is selling relatively well in the US, UK and elsewhere, due to
enhanced styling, intensive marketing and a good retail presence.”

Released in April 2015, the Apple Watch was the first new Apple device since the iPad. It was also the
first product developed under the leadership of CEO Tim Cook (Cook) and outside the shadow of the
company’s founder Steve Jobs. The Apple Watch was a smartwatch that integrated with iOS and
displayed notifications like text messages. It could also be used to make calls and supported third-
party applications. Though the company did not share the standalone sales figures for the Apple
Watch, Cook announced that sales of the device had nearly doubled since 2016. In the year the Apple
Watch was launched, the company sold twice as many watches as the number of iPhones it had sold
the year the smartphone had debuted.

BACKGROUND NOTE

Apple was founded by Steve Jobs, Stephen Gary Wozniak (Wozniak), and Ronald Gerald Wayne
(Wayne) on April 1, 1976. Initially, Apple was a computer company that competed with much larger
companies such as International Business Machines Corporation (IBM). Jobs’s second coming to Apple
saw the company entering new categories with products that turned out to be quite disruptive.

In August 1998, Apple unveiled the iMAC, a sleek and colorful computer that personified Apple’s skill
in design and functionality. Priced at US$ 1,299, the product was a big success and sold over 278,000
units in the first six weeks. Before this – on November 10, 1997 – Apple launched a website
(www.apple.com/store) to sell directly to customers online.

APPLE’S ENTRY INTO WEARABLES MARKET

The smartwatch as a wearable device category had taken center stage in the consumer tech market
since 2012. The market had evolved and grown with companies such as Pebble Technology Corp.,
Samsung, Garmin Ltd, Sony , Xiaomi , Motorola, Huawei , and LG launching their own products. In
March 2014, Google, Inc. (Google) launched Android Wear, a version of Google’s Android operating
system designed for smartwatches and other wearables. Android Wear focused on watches that came
in a range of styles from different manufacturers. In 2014, an estimated 6.8 million smartwatches were
sold at an average price of US$189. About 89 companies from 18 countries sold smartwatches in 2014.
Samsung led the smartwatch market with 1.2 million unit sales and a 17.65% market share followed
by Pebble, which shipped an estimated 700,000 devices in 2014.

THE LAUNCH

Finally, on September 9, 2014, Cook unveiled the Apple Watch featuring revolutionary new
technologies and a pioneering user interface. “Apple introduced the world to several category-
defining products, the Mac, iPod, iPhone and iPad. And once again Apple is poised to captivate the
world with a revolutionary product that can enrich people’s lives. It’s the most personal product we’ve
ever made,” said Cook. The Apple Watch enabled users to communicate in unique ways right from
their wrist by sending and receiving messages, answering calls to their iPhone, and using
comprehensive health and fitness apps that could help them lead healthier lives. The Watch boasted
of some interesting features, such as its Digital Crown (a small dial on the side of the device that was
used to scroll, zoom, and navigate without obstructing the display), taptic engine (which subtly
vibrated to let users know when they had received a message or a notification from a source), and
sensors built into the back of the watch to monitor vital signs such as heart rate.

DRAWBACKS

According to analysts, Apple’s Midas touch on smartphones and tablets had failed to rub off on the
widely anticipated Apple Watch. The smartwatch was criticized for its limited functionality, poor
battery life, slow speeds, unoriginal features, and high price. Common complaints included short
battery life and users’ difficulty in configuring them to personal preferences. Analysts felt that the
Apple Watch was like a me-too product that had failed to differentiate itself from any other smart
wearables in the market.

RESULTS

Apple did not even reveal the unit sales of the Apple Watch in its earnings report, citing competitive
reasons. According to Daniel Eran Dilger, editor of Apple Insider , “One of the reasons Apple doesn’t
detail the unit sales of Apple Watch is that it would reveal not just how many were sold, but also what
prices buyers are paying on average, offering hints at how much Apple is earning from sales of bands
and licensing. With that data, a competitor would know what products to develop at what tiers in
order to more effectively compete with Apple Watch.” Instead, the company bundled it up as a part
of the ‘Other Products’ category which combined sales of the Apple Watch, iPod, Apple TV, Beats
Electronics, and third-party accessories. The sales estimates for the Apple Watch mostly came from
third-party data.

A SUCCESS OR FAILURE?
The Apple Watch received mixed reviews. While some believed it to be yet another example of Apple’s
innovation and leadership, others were distinctly unimpressed with the gadget and found it
underwhelming. The Apple Watch sell-through was reportedly higher than the comparable launch
periods of the iPhone or the iPad. Despite its late arrival to the wearables market, Apple claimed the
top spot in terms of device sales as it accounted for over 50% of smartwatch sales in 2015.

CHALLENGES

Going forward, the Apple Watch’s lead in the smartwatch market would be increasingly challenged by
the rebounding competition, said analysts. Fitbit was touted as Apple’s most significant rival in the
wearable market. Google was planning to launch two new smartwatches within the first quarter of
2017, both running Android Wear 2.0 . Luxury brands such as Hugo Boss (US$395), Tommy Hilfiger
(US$295), and Michael Kors Access (US$350) all undercut Apple on price.

THE ROAD AHEAD

The company was reportedly gearing up to launch a new edition of the Apple Watch, presumably the
Apple Watch Series 3, in the second half of 2017. The third generation Apple Watch was expected to
come with more compelling apps, better connectivity, and a new design that would make it look more
like an actual wristwatch and perform more like a standalone, connected gadget replete with unique
applications. “The Apple Watch hasn’t exactly been the success the iPod, iPhone, and iPad initially
were (though to be fair the iPhone and iPod weren’t that great the first year either); with demand
matching that of the iPod’s currently, and Apple apparently rushing to get a revised model out the
door, things aren’t looking good for this product. That said, I’m not convinced it is really dead, and
given it took three tries to get the iPhone and iPod to overcome their initial issues, there is good
likelihood that by the third version Apple will have a winner,” said Enderle.

Issues
 Understand the rationale behind Apple’s entry into the wearable devices market.
 Understand the issues and constraints in entering a new market with a new product, and in
this context understand how Apple successfully launched the Apple Watch.
 Analyze the prospects of the global smartwatch industry.
 Appreciate the difficulties in transforming a niche product into a mainstream product.
 Explore future strategies that Apple can adopt to maintain its growth in the sales of the Apple
Watch.