What’s Wrong with Apple’s Watch?
Yesterday was the big keynote for Apple, announcing the sale date and prices for their new product, Apple Watch.
I’m being more cautious about the watch than I was about the iPad. I thought the iPad was a joke but it turns out to have been a great idea. They created a desire where there was none and now everyone has one.
Personally, I just have zero desire to wear a watch. It wasn’t the technology I ditched, it was that I didn’t like having something on my arm all the time. Even now, when I dress up sometimes I’ll slip on my old fancy watch, and it just bugs me. I can’t imaging having something on my arm that might get hot because it’s connecting to things or having to remember to charge it.
But that’s not what worries me about the watch. I’m convinced that people will buy it, especially next year when they release a $99 version. (That’s their habit.) What concerns me about the watch, for Apple, is that they have a monster inventory issue that will eventually kill them.
Think about it like this: They used to have one phone, the iPhone. And in the United States it worked only with AT&T. Great… it’s easy to make and inventory something. This is the Henry Ford model of mass production. (A model that is driving the growth/success of Southwest Airlines, by the way.) But the iPhone 6 has tons of models and options. You can chose different colors, different storage sizes, and different mobile carriers. It’s confusing for customers because they can’t just walk into a store and ask for the latest iPhone… now they have to make a lot of choices. And it is incredibly expensive to stock. Imagine being a retailer… to sell the iPhone 6 you have to stock tens of thousands of dollars in iPhone’s in all of your stores. Think about that from a global perspective and you’ll see that Apple must have BILLIONS of dollars in inventory for products that their own system is constantly making obsolete. (People only want the latest phones.) As an investor this huge shift in business model in the post-Steve Jobs Apple keeps me away from buying their stock. It’s popular. But boy is it risky.
Into that comes the Apple Watch. There are 25 different models currently available, with nearly unlimited options.
Take the case of Best Buy
Imagine the risk as the buyer at Best Buy? You have 1050 stores and your customers are going to expect each store to have all 25 models on day one. So let’s say you place and order for all 25 models, starting with 50 units of each of the 25 models at an average wholesale cost of $175. Each store will be starting with $218,750 in inventory on the Apple Watch. That’s an initial order of $229 million to cover just U.S. stores. Sure, that’s the potential for $500 million or more in sales. But that’s a ton of risk for Best Buy because they just have to take a guess at which models will be most popular to customers.
For a retailer, even one as large as Best Buy, putting $229 million on the line for the potential of $500 million in sales is a lot of risk. In 2015, they’ll do about $40 billion in sales… a $229 million risk on just one of their products in their store is a big, big risk.
And that’s just one retailer.
Now imagine you are Apple worldwide? You have to manufacture for orders to sell to thousands of retailers like Best Buy while also serving your own retail Apple Stores and your online customers.
All of that means that they are paying to build billions of dollars in Apple Watch’s various models without ever really knowing if customers are going to buy them. If it works, the world’s largest company just got bigger. If it doesn’t? You’ll have to account for that loss to stockholders.
In my opinion, even for a company that seems bulletproof like Apple, it’s a very risky step.
I’ve had Apple in my personal portfolio in the past. But right now? That’s too much risk for me as an investor.
The Internet of Everything
Maybe you’ve heard this term, the Internet of Everything? It’s kind of a buzz word and the unofficial theme of this years Consumer Electronics Show. Essentially, the trend is to get everything in your home to connect to the internet so that you can monitor it and control it with your phone. There are funny examples… like a device that let’s you know how many eggs you have in the fridge to more serious devices that control the thermostat or your home security system.
The Apple Watch is part of a movement of “wearables.” Companies like Garmin, FitBit, and JawBone have been making devices that people wear for fitness purposes or to talk on a cell phone. It’s big business and no one is blaming Apple for getting into it, even if they are a little late.
The simple reality is that our phone and these devices are starting to track all of our movements, our purchases, or plans, our calendars, and now that we’re connecting our homes and bodies to them… it’s getting to be a lot of data. You, as a user, are literally a network of everything.
How Much is Too Much?
Last week, I listened to a fascinating conversation on NPR about wearables and the data they collect called, “Sure you can track your health data, but can your doctor use it?”
The quick answer is… “No.” Your doctor doesn’t want that data as they aren’t trained to use it, don’t know if it’s accurate, and if you are transmitting data to them they somehow become liable for that data legally.
But it brings up a larger, more important question: Where is all of this data going?
I don’t mean literally. Literally, the data is going to servers and it won’t be long before advertisers and marketers are able to purchase all sorts of data about you that you willingly share so that they can hit you with an ad on iTunes Radio just at the time of day you normally take a break and walk over to Starbucks. That’s literally what is happening.
But, more figuratively, what are you doing with that data yourself? And if we’ve gone from desktops to laptops to mobile phones/tablets to wearables… it won’t be much longer until we’re talking about Apple’s new device, an edible / embeddable device charged by the electrolytes in Gatorade that lives in your large intestine.
I mean, neuroscientists are already perfecting technology that can read your thoughts! It won’t be too much longer until the internet of everything is literally, the internet of everything. Won’t it be interesting to have your phone play a song embedded with an ad for your favorite taco shop because your stomach is starting to tell your brain that you’re hungry for lunch?
I don’t know. All of this is starting to feel like too much. And, as I’m out talking to teenagers around the country, they are getting tired of all of it. I am not saying that the technology won’t be there and I’m not saying that I don’t think people will adopt wearables or even ingestibles… I’m just saying there’s going to emerge some questions about how much data is too much data?
Is This Good or Bad?
I don’t know. But I do know the whole thing is interesting.
And as much as I can’t imagine why I’d need the Apple Watch. Apple has proven, over time, to speak my language and market things to me I don’t really need but eventually want.
Something tells me I’ll be standing in line for a watch sometime in the not-so-distant future.
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