What the Apple Watch Really Does

Over the past decade-plus, Apple (NSDQ: AAPL) has brought out major game changing products in roughly four-year time cycles. So this year everyone has been saying it’s been four years since the last big product announcement so this must be the year of the Apple Watch.

Last week Apple finally announced its brand new Apple Watch (Note: it is not the Apple “iWatch” – perhaps Apple has finally grown tired of putting that silly “i” in front of all their products). Apple’s stock price went up and down during the show while they released their latest products . The Apple Watch is slated for sale in early 2015. My daughter texted me that same day informing me that Apple had released the product; that is her way of saying she wants one! Let’s review what Apple announced last week.

The Apple Watch will of course tell time but it is first and foremost it a mini-computing device so it will do much more than that. Apple may have tipped its hand earlier this year when it purchased Beats Electronics. Beats had its own music streaming service, but the $3billion price that Apple paid was for the fashion sense Beats created with their headphones and the name of the fame rapper Dr. Dre. Beat’s hardware has become a fashion statement with the hipsters and the Apple Watch, without a doubt, will be an enormous fashion statement. Some are even saying it will make the standard watch relevant again. But no matter whether anyone cares about watches anymore – the Apple Watch will become instant American couture.

Apple announced three styles, from “sporty” to “fashion forward” which includes 18carot gold frames. Though one could argue gold is a great conductor lets be real – this is a fashion forward statement.

Apple Watch with app icons


The crack I made about gold being a great conductor is only partly sarcastic. The Watch is a medical monitoring device strapped to your arm. The many Apps which are available for the watch can tell you such things as heart rate, blood sugar level, blood pressure, calories burned, and steps walked. Apps it may include could tell you about the air pressure in your car’s tires and in the air around you, your altitude, the temperature wherever you are, the weather forecast and more exotic things like your ultraviolet light exposure.

It even has heuristics built in it to learn your daily exercise patterns. In short, it will become a kind of new Swiss army knife version of information that you no longer have to reach into your pocket to access. No longer will it be that old arm motion of raising your wrist and dropping your eyes that we had been doing for a hundred years till the Smartphones came along and gave us the time and much more.  

If the Apple Watch does what all other smart watches have failed to do – sell well – several machines which you had to either lug with you or go to special places to use will be converged within a single device. Convergence in the tech world is typically a very good feature for any new product. This is true for this product as well.

The Apple Watch will not be a standalone phone. Most people have a Smartphone and I doubt many would buy another with yet another phone plan. No, Apple did just as Samsung did and brought out an electronic watch which is a device which will interface with your Smartphone, but not replace it. Rather, it will be an extension to your iPhone. With all the Apps you will be able to send text messages, place phone calls and talk into your Apple Watch just like Dick Tracy did back in the old cartoons. It will also have Apps galore to measure everything you could possibly want to measure.

The 2015 Apple Watch will be far too small for my middle aged eyes. This is exactly why I don’t think I will purchase an Apple Watch. I can barely read the text on my iPhone and that screen is several times larger than the Apple Watch screens will be. About a decade ago my mother gave me some family photos. One was of my great grandfather standing next to his brand new bicycle wearing the latest biking fashion.

 Leo's grandfather with bike

Though the car would come to dominate the previous technology long wave – the bicycle was an important technology in and of itself. The Wright brothers were bicycle makers who created the first powered flight utilizing core technology from the bicycle of all places.

Whether the Apple Watch goes on to substantively make the kind of technological contribution the bike did is yet to be seen. But what I can tell you is if you look at the picture of my great grandfather’s, you can see he went to a photography studio and dressed in the latest couture for the biking mania which had swept Europe. He owned and operated a small metal foundry in Vienna, Austria where he made church bells. He was upper -middle class though not rich and this is very likely the target market Apple is seeking to target with their Apple Watch.

The Apple Watch will have multiple price points. Depending on the data storage capacity and size Apple Watch you purchase will determine the price of the product. The base Apple Watch will retail for $349. For me, I will not be buying one unless it can restart my heart automatically in the event of a heart attack. I mean, why not be fashionable and health conscious at the same time after all!

One area the Apple Watch is attempting to make inroads is paying for purchases wirelessly. Mobile payments have been the Holy Grail for the industry for years. To date there have been several products which allow you to pay for things without taking your wallet out. But none have been successful in that none of them has become the universal standard which all stores adopt.

More importantly to me is that the phone will be loaded with wireless features. The short range wireless specification will be how the Apple Watch talks to everything from your iPhone to a potential future “iCheckout pinpads” at your local stores. This is likely to one of the areas where I expect Apple to demonstrate their dedication to innogration (which means the combination of innovation and integration of existing technologies to produce a superior product in terms of ease of use which will go on to redefine the category).

Apple has integrated a mobile payment system where your credit card information is not stored on the watch and therefore in theory is more secure. More importantly for Apple investors is the stake it has put in the ground within a new, and enormous, market. Apple has made agreements with large retailors to use this new technology built into their iPhone and Watch.

Apple went further and has created an entire payment system which will work over the Internet as well as for mobile payments. This is the first serious competitor to move into PayPal’s marketspace. PayPal is roughly half of all of parent company eBay’s revenue today. This is a huge market and creating an ecosystem to attack it may prove to be a larger revenue generator versus any product Apple sells today.

In integrating a “sticky” ecosystem – one which makes any user think twice about leaving once they enter it – Apple has again differentiated itself against Samsung and other Smartphones and Smartwatch competitors. What Apple tends to better than the rest of the industry is to not invent totally new technology and just throw it out there. Instead, Apple improves and integrates existing technologies to improve the end user’s experience. Apple’s innogration ethic in creating complete ecosystems is what generates all the profit dollars that makes them the Walmart for consumer technologies.   

From an investor’s point of view I don’t expect the Apple Watch to do anything other than add yet another revenue stream to Apple’s river of cash which flows to the company every day. However, I don’t expect to see it as anything more than what the addition of air conditioning or the radio was for the automobile. The automobile was improved but it was the sale of the automobiles which made the prior tech wave the powerful force that it became.

Last week Apple announced several enhancements to their iPhone, including larger screens and more Apps. The iPhone is Apple’s entry into the marketplace which parallels the car industry from the prior tech wave. To me this means the most important product Apple is making is still their iPhone. The iPhone continues to reduce PC sales as Smartphones displace PC sales for end users today.  

The iPhone will be integrated with the Apple Watch as the iPhone is totally integrated with all of Apple’s other products. Those industry leading products are made best when used together. For instance, if you listen to music on your iPhone – you know how easy it is to use with Apple’s software product to manage your music library – iTunes. I have used iTunes on Android Smartphones and it is a very real pain to use comparatively. I actually got rid of my first Smartphone which was an Android because it would blare music whenever it felt like it – like when I was in a meeting at IBM and Springsteen started caterwauling Born to Run in a conference room. Yes, it cracked everyone up the first time it happened. The second time I had to just power the phone down and quickly dumped it.

I personally do not expect Apple to invent an iPhone kind of product every four years. No company in history can invent core technologies which are that disruptive on a constant basis. Instead, I expect Apple to continue to mature the iPhone and the ecosystem surrounding it while charging a premium for their products. In so doing Apple generates what I care about in investment; piles of profit dollars to grow share value while continuing to build one of the largest cash stockpiles of any company in the world.

Like Ford and General Motors in the 1920s to the 1960s, Apple’s cash enables it to continue to be able to practice the tech industry’s best innogration strategy on the planet today. If they are late with an offering they are able as a result of the cash to improve on the competitor’s product by integrating it within their ecosystem.

So if the Apple Watch can’t restart my heart – as I expect it will not be able to do – no worry for me relative to last week’s announcement. The import is in the addition of a feature which extends Apple’s dominance of the Smartphone industry which is the most significant technology for consumers today.

Actually, the biggest news last week was the Apple Payment System. Apple is the only company today which could deliver a mobile payment system. For shareholders, Apple taking a piece of most mobile transactions is good news. It is also likely very bad news for PayPal. It is not that the stock went up and down over the course of the conference call. Rather, it is the stock has much more to run with Apple’s entry into two different markets. That is why Apple is still in growth mode and is paying a nice dividend to boot.

Apple remains a buy up $95 in the STI Investments Portfolio