The Right Time for an Apple Smartwatch

by Brad Moon | February 12, 2013 12:07 pm

Is Apple (NASDAQ:AAPL[1]) planning to release a wristwatch? Over the past two years, we’ve seen rumors, a possible smoking gun and various pieces falling into place. Now, the Internet is lighting up while executives from watchmakers around the world are undoubtedly losing sleep.

Here’s a recap of the events.

Smoking Gun

Apple’s iPod Nano spent several years in a square form factor and included a color display with a fun analog watch option. This launched an iPod Nano wristband cottage industry (transforming the Apple device into a high-tech wristwatch) that culminated with the TikTok[2], a Kickstarter campaign that aimed for $15,000 and ended up with just short of $1 million in pledges. In 2012, Apple changed the iPod Nano’s form factor, effectively killing future efforts to transform it into a watch.

Pieces Falling Into Place

• One of the highlights of CES 2013 was the press conference announcing that the Kickstarted Pebble smartwatch[3] would start shipping, with 85,000 orders. There’s demand for smartwatches, and they’re going mainstream.
• Apple hired an OLED expert[4] away from LG. OLED displays are flexible, perfect for avoiding having a large, flat slab of glass mounted to your wrist.
• Corning (NYSE:GLW[5]), the company that’s found new life in producing specialty glass — like Gorilla Glass — components that the electronics industry depends on, has a new product out called Willow Glass[6] that fits the bill. According to Corning, this “ultra-slim flexible glass will also help develop conformable (curved) displays for immersive viewing or mounting on non-flat surfaces.”
• Apple is under pressure to do something after losing $140 billion in market capitalization[7] since last fall, with earnings feeling the heat as profit margins fall. Finding a new market to dominate and selling premium versions at high margins is what Apple does best.

Rumors

• Some reports are circulating that Apple is partnering[8] with Intel (NASDAQ:INTC[9]) on the watch. Two issues with this one. First, while Apple may have a hate on for Samsung and want to cut it out of any new smartphone venture, Intel’s mobile chips have a reputation for excessive power consumption. That’s being addressed with upcoming versions[10], but a smartwatch needs to sip power, and Intel would be a gamble. Also, iOS hasn’t been ported to support Intel architecture, it currently requires ARM (NASDAQ:ARMH[11]) chips like the Apple-designed, Samsung-manufactured A6. It goes without saying that an Apple watch would be powered by iOS, the mobile operating system that runs everything from the iPhone and iPad to the iPod Touch and Apple TV.

Packing the gear in a smartwatch will be more challenging than trying to jam it into a smartphone. While chunky watches may be fashionable, there are limits to what you can expect people to strap on their wrist every day. The A6 chip that powers the iPhone 5 is tiny[12] enough at roughly 0.4 inches on a side, but there’s a lot more technology that people have come to expect: a color display, battery, storage, sensors (like an accelerometer or maybe a heart rate monitor), GPS, Wi-Fi, Bluetooth, speaker, maybe even cellular capability.

A smartwatch that covers peoples’ wish lists — health applications, built-in navigation, video calling, radio, social media and email alerts, video games, music player and others — starts getting big, with the danger that it ends up being a squared-off smartphone on a strap. Even a curved-glass display would only serve to make such a device less likely to catch on doors. If it’s too big, Apple diehards will buy it, and some people will wear it ironically. But it won’t hit mass-market sales levels — and that’s what Apple is interested in.

Of course, Apple could take the path of leveraging its iPhone. An Apple smartwatch would be smart to a limited degree on its own, but when paired by Bluetooth with an iPhone, would take advantage of some of the iPhone’s components such as cellular connectivity, onboard storage and GPS, eliminating the need to cram those into the watch case.

In this case, an Apple smartwatch becomes much more svelte and not only has high-tech appeal on its own, it also boosts the case for buying an iPhone or iPad at a time when these devices are under intense competitive pressure.

It’s pretty much agreed that if Apple is to return to the heady days of a $700 share price (with $1,000 tantalizingly plausible[13]), it needs to accomplish two things: get those margins back up and find another high-volume market to disrupt and dominate.

Does a smartwatch qualify on either of those fronts? Done right, it would not only accomplish these goals but also help goose iPhone and iPad sales.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/02/the-right-time-for-an-apple-smartwatch/

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