There’s an inherent danger in Excel spreadsheets and PowerPoint presentations. The content of both are often treated as fact. Reality tends to be different than spreadsheets and bullet point presentations.
Such is the case with Apple Watch and the iPhone. One market analyst has climbed out on a limb and predicted that Watch will surpass iPhone profitability. When? When pigs fly? Or, when the iPhone becomes so small and powerful and wearable you won’t need a phone at all?
My first thought upon hearing the premise that Watch will become more profitable than iPhone– probably the world’s most profitable mobile device– was laughter; followed by a touch of derision, followed by some thoughtful meditation and a change of heart.
Why the change of heart? Two words: Cannibalization and miniaturization. First, Apple is not afraid to cannibalize a popular product line with another product. Second, to use a Watch you have to have an iPhone already. So, how could it be possible that Watch will become more profitable than iPhone.
Look down the road. iPhones have been getting larger, but the price has remained steady and competitive thanks to dropping component costs. Watch started out small, but anyone who understand technology must believe that it will become more capable in the next few years; lighter, thinner, faster, more storage, more sensors, etc.
Look at iPhone in 2007, and look at iPhone today. Lighter, thinner, faster, more storage, better screen, more capabilities; almost a Mac in your pocket. What will Watch be capable of eight years from now?
First, it’s likely you won’t need an iPhone tethered to Watch. Second, it’s also likely that Watch of 2023 will be nearly as powerful as iPhone of 2015; sans the larger screen, but with more voice recognition interaction and built-in sensors than we have on our Apple devices today.
Killing It With Math
My first view of Watch vs. iPhone is that there’s no math to support the premise that Watch will one day rule Apple’s revenue and profits. Or, just profits. After all, Watch is very small. The same analyst who predicted Watch as the most profitable device says Apple could sell 35-million units next year. iPhone sells nearly double that in a single quarter. Now. If both have similar gross margins, iPhone wins. Now.
Apple just may have the capability to ramp up production of Watch so high that it costs less than half what it costs to manufacture an iPhone. In that likely scenario, if Watch only sold half as many as iPhone it would be as profitable or more profitable.
Eight years is a long time into the future, so specific events and product capabilities are difficult to pronounce, but stranger things have already happened. BlackBerry, Nokia, and Microsoft’s mobile efforts are in a death grip– courtesy of iPhone. Who would have predicted that back in 2007?