Apple's Watch Will Be Bigger Than You Think


Apple doesn't even have a smart watch on the market, but that's not stopping naysayers from shooting it down.

Jefferies analyst Peter Misek -- who has an uninspiring hold rating and $420 price target on the shares -- talked down the prospects of the long-rumored iWatch yesterday.

By his math, with an installed global base of 250 million iPhone users and a 5% penetration rate -- or just 2.5% a year given the two-year replacement cycle on iPhones -- he's projecting just 6 million of these devices shipping annually. At an average selling price of $175 apiece and a modest 30% gross margin this translates into just $0.27 a share in earnings and $1 billion in revenue.

It's hard to argue with the price. Apple won't be able to sell these for much, and they won't be subsidized by carriers the way that iPhones are domestically. Pebble established the market with its $150 smart watches, and Apple won't be able to go for much more of a premium if the functionality is the same.

However, it's hard to accept that just 6 million people will be buying these a year. Apple has too many hardcore fans. If 5 million people turned out to snap up Apple 5 smartphones the weekend it hit the market, there will be a lot more than 6 million early adopters over the course of the iWatch's first year on the market.

We're also assuming that Apple isn't going to raise the bar here. The iPhone changed the game for smartphones, and the iPad introduced the world to a form factor that it didn't think it needed. This isn't going to be the iPebble. If that was it, we would've seen it by now.

Misek is generally unimpressed by the current crop of smart watches on the market. The small screens and cumbersome buttons aren't enough to justify the convenience of not having to take the paired smartphone out of the pocket or purse.

Wearable computing has been more hype than marketability. Google turned heads when it first showed off Google Glass, but criticism has grown now that they are being spotted in the wild as beta testers kick the tires.

However, Apple won't get that kind of negative reaction with the inevitable iWatch. It won't be as expensive. It won't look as fashionably suspect.

To be fair, Google isn't as hungry as Apple. It doesn't need Google Glass to be a hit. Apple, on the other hand, can't afford to fail with its next new product. Confidence and the shares have come under pressure since the iPhone 5 rolled out, and a poorly received new product would further call into question the company's ability to innovate under CEO Tim Cook.

However, it's also comforting to see analysts already talking down the smart watch. It will make it that much more impressive when it does hit the market. More importantly, few seem to be hitting on the real reason to get excited about the iWatch. It's not about the money that Apple will make. It's about improving the iPhone experience. It's about retention. It's about making the iPhone cooler than an Android smartphone paired up with a Pebble. It's about raising the bar -- again -- in mobile. It's about forcing everyone else to catch up.

The iWatch will matter. It better.

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Originally published