Category Archives: iPod

The future of Apple Watch will be more like the iPod’s than the iPhone’s

Note: this is the second post from Aaron Miller, who is now authoring occasional posts on Beyond Devices under the Studying Apple banner. Aaron is on Twitter at @aaronmiller


When Apple announced its earnings this week, they were as reticent as they promised to be about the number of Apple Watches sold. Still, some details did leak out giving us a sense of Watch’s first quarter. (Be sure to read Jan’s post where he estimated sales based on what we know.) Here they are, summarized:

  • The Other category, where they include Apple Watch revenue, grew sequentially by nearly $1 billion.
  • Apple Watch customer satisfaction is higher than for the iPhone and iPad.
  • Apple sold more Watches in its first quarter than in the first quarter of iPhone or iPad sales.

The last detail is probably the most interesting one. Comparing the Apple Watch to the iPhone implies a story about a massive future product, if not necessarily about a current one.

But the Apple Watch is hugely different from the iPhone. In fact, it’s much more like the iPod, a product now relegated to Apple’s history despite the recent updates. With iPhone at the top of everyone’s mind, we’re too quick to forget the iPod story and how similar it might be to the one playing out with the Apple Watch.

An Ecosystem Product

First, and most importantly, the Apple Watch is an ecosystem product. Right now, the Watch only works as an extension of the iPhone. Its upper boundary is the total number of iPhones in the world.

This makes the Watch much more like the iPod than the iPhone. From the time the iPod first launched, it was a product tied to a computer, first to Macs then eventually to Windows computers as well. 1 (Remember the Digital Hub strategy?) Just as the iPod existed to enhance the Personal Computer + iTunes ecosystem, the Watch exists to enhance the iPhone ecosystem. The iPhone, even if tied to iTunes early on, was never merely an ecosystem enhancement—nor designed to be one, like the iPod or Apple Watch have been.

Naturally, we expect the Watch’s reliance on iPhones to change over time. LTE and GPS seem like inevitable Apple Watch additions, for example, as does a Watch-native App Store. With true third-party apps coming soon, reliance on the iPhone will diminish even more. But there’s one limitation that may always tie Apple Watches to iPhones: the screen. Absent new technology to overcome how limiting such a small screen can be, the Watch will continue to be a capable iPhone enhancement more than a standalone product. The iPod’s limitations—most prominently, no native way to get music on it—similarly tied it to computers.

An Unsubsidized Product

The iPhone spent its first year not subsidized in the traditional way by AT&T, reflecting Apple’s intent to turn the mobile market on its head. Clearly this stood in the way of sales, because Apple changed tack just a year later with the iPhone 3G and created a much lower entry price for customers.

There are no carriers to subsidize Apple Watch purchases, and it’s hard to imagine such a subsidy ever materializing. (Perhaps we’ll all have wrist-phones someday, but taking calls on an Apple Watch is a current feature and people aren’t going nuts about it.) Without a subsidy, Apple’s profit margin has to come directly from customer’s wallets instead of indirectly through carriers.

The iPod hoed that row, and did just fine. It did sell less total units than the iPhone and had a slower upgrade cycle, but it was a record-breaking product nevertheless.

A Category-Defining Product

It amazes me how easily people forget what MP3 players looked like before the iPod. They were clunky and difficult to use. They were full of deal-killing trade-offs between physical size, capacity, battery life, and user interfaces. Some of the products were especially weird as companies tried to find niches. The iPod eliminated the majority of those trade-offs for a higher, but manageable, price.

To be clear, the Apple Watch category is not just smartwatches. The correct category is wearables, and wearables right now, at the birth of the Apple Watch, are very similar to the early MP3-player market. Some are huge and multi-functional. Some are svelte and limited. Some are banking on unique features trying to find a niche.

Because of the Android ecosystem, the Apple Watch may never wholly dominate the market like the iPod did, but it will define the category. Of course, most of Apple’s products shape their categories. But the iPod defined the category. It organized and crystalized the MP3 market. Back then, people weren’t sure what to make of MP3 players and their future. The same is true of wearables, especially smartwatches, today.

What the Future of Apple Watch May Hold

If the Apple Watch story does end up similar to the iPod story, we may see the following things play out:

  • The Watch will grow the iPhone ecosystem by driving switchers. The famous iPod halo effect gave people a reason to consider a Mac where they never had before. (This was helped in no small part by Apple Stores, where people would go in to buy an iPod and walk out with a new computer.) This effect is not trivial. PC sales as a multiple of Mac sales have been in steady decline since the iPod. It might be a coincidence that Apple reported the highest ever level of Android switchers this quarter, but expect to see even more.
  • The Watch will define and dominate the wearables category. If the Watch moves like the iPod did, you’ll see niche players like FitBit disappear. You’ll see some large competitors play copycat on features and design, but they won’t reach comparable market- or profit-share. Eventually, all wearables will be measured by the Apple Watch, just as all competing music players were measured by the iPod.
  • The Watch will get differentiated in more than just size and build materials. At its peak, the iPod branched into everything from the Shuffle to the Classic to the Nano in order to fit multiple budgets and preferences. It’s reasonable to see Apple doing something similar with the Watch. If I were to guess, I think the fitness tracking will be a core feature across all Apple wearables. (Imagine in three years the inexpensive Apple Fit, where Apple reinvokes the old FitBit-style devices killed off by the Watch. People will laugh at it. When they do, remember the iPod Shuffle.) Being an ecosystem product that can rely on iPhones, the Watch gives Apple the flexibility for slimmer features to get lower price points.
  • The Watch will see slower customer upgrade cycles. In this regard, the Watch will be like everything Apple sells except for the iPhone. 2 iPods continued working for many years beyond their purchase date. (My son is using a sixth-gen Nano that’s now over five years old.) As a result, iPod sales flattened before the iPhone entered on the scene, mostly because Apple had saturated the market and upgrades weren’t moving quickly. Just like with the iPod, expect Watch buyers to be much slower upgrading than they are with their iPhones.
  • The Apple Watch could eventually work with Android phones. I’m not at all confident on last this point because the history lines up much less reliably. Mac market share at the launch of the iPod was a small fraction compared to iPhone market share today. Apple had to get the iPod out to Windows to have any kind of customer base for it. Obviously, there’s no comparison between the 25 million Mac users in 2002 and the nearly 500 million iPhone users today.  Ultimately, this decision will depend on whether Apple feels the Watch serves better as an exclusive feature of the iPhone ecosystem or that it needs to sell to a larger market, followed by a halo effect to drive switchers after they’ve bought an Apple Watch. 3

Certainly, the Apple Watch won’t follow the iPod in every detail. But if the Watch does approximate the iPod’s history, Apple should be incredibly happy. It will be a historic product, and people will forget what life was like before it launched.

Notes:

  1. Only the iPod Touch, which owes its DNA to the iPhone, could eventually operate entirely without a computer. But consumers see it essentially as a less capable iPhone, not a dramatically better iPod. Not coincidentally, it’s been a footnote to the iPhone’s success more than a dramatic culmination to the iPod line.
  2. A recent example: when iPad sales began flattening, some writers declared failure, because they were expecting iPhone-like growth. Smarter analysis recognized that 1) the market for tablets is smaller, and 2) without subsidies, the upgrade cycle is longer.
  3. Obviously, an Android-capable Apple Watch would mean a different Watch than we have now, including a native App Store. Such a feat, though, is not out of the question.