How Apple Watch became the iPod of the future

Posted:
in Apple Watch edited May 2016
While ridiculed by many as a flop and often misunderstood as a product, Apple Watch has very successfully worked to turn around the fortunes of Apple's Other Products segment, essentially becoming the modern iPod for the next decade. Here's how.




iPod: a tethered Mac peripheral



Almost fifteen years ago, Steve Jobs introduced iPod, a self contained "pod" for taking music from your Mac's iTunes library along with you. While music playback was its primary feature, iPods also let users carry a synced copy of their contacts and calendar, then gained photo support, video playback and eventually the ability to play simple games in 2006.

As a product, iPod took nearly four years to develop into an outstanding smash success. After four years of blockbuster iPod sales, Apple applied many of the manufacturing lessons it had learned from building mass market iPods to produce the first iPhone in 2007, which unlike earlier iPods ran a scaled down version of Apple's desktop Mac OS, using a mobile-optimized UI with the ability to run powerful "desktop class" native apps.

Even as iPhone sales rapidly grew, Apple kept developing new iPods in parallel. The iPod nano, first released in 2005, shrunk down into a "fat" 3G form factor in 2007 with video playback capabilities.




After returning to its original stick design for the next two years, Apple reintroduced a compact, new square 6G iPod nano in 2010 (below), featuring a touchscreen display similar to the iPhone and iPod touch (albeit not running iOS).




"It's so small," Steve Jobs announced, "we're able to put a clip on it too, so it's instantly wearable."

The new wearable iPod nano let users tap and swipe the display for navigation, and Apple also focused attention on its fitness tracking capabilities, oriented around an accelerometer for tracking steps.

The original Apple watch was an iPod nano



Third parties--not Apple--created the first watch band for the 6th generation iPod nano. However, the next year Apple not only noticed the brewing popularity of wearing the new iPod nano as a watch, but also embraced it.

Phil Schiller, then Apple's senior vice president of Worldwide Product Marketing, introduced a refreshed 6G iPod nano in 2011, noting the availability of third party wrist bands and stating that the company "thought that was really fun," so it added 16 clock faces users could choose between when wearing it as a watch.

"Why not, right?" Schiller asked the crowd.


The original Apple Watch was an iPod nano


The next year, however, Apple abruptly discontinued the watch-like iPod nano and replaced it with a new model that looked like a shrunken down iPhone, featuring basic apps (lacking an App Store) that appeared as round icons (and still not running iOS). Apple continues to sell that 7th generation iPod nano model, which first introduced in 2012.

The case of the disappearing iPod nano watch



The 2012 realignment of iPod models appeared--at the time--to be a simple refocusing of resources on iPhone and newly introduced iPad models. Interest in basic iPods had already started to wane. Sales of iPods had peaked around 2009, and the majority of remaining demand focused upon the iOS-based iPod touch, a model that helped convince many feature phone users--along with Symbian, Blackberry and Windows Mobile users--to upgrade to an iPhone with the same UI and features.

However, if you listen to what Apple executives later said about Apple Watch, you'll note that its development began "years" before its announcement in September 2014.

Apple hired Adobe's chief technology officer Kevin Lynch in early 2013, but at that time, little was known about what he'd be doing apart from the fact that he had significant experience in user interface design.

Lynch had worked on UI for such apps as FrameMaker and Dreamweaver, and prior to that, developing user interface elements for early mobile devices at General Magic (a portable computing company Apple spun off in 1990 to focus its efforts on the Newton Message Pad) as well as platform development experience related to Adobe Flash middleware.

Shortly before Lynch was hired in early 2013, Apple announced an executive shakeup at the end of 2012 that resulted in the ouster of Scott Forstall as the head of iOS development. It also resulted in the creation of a new Technology group led by executive hardware guru Bob Mansfield, who had previously announced plans to retire that year.

Tim Cook had initially retained Mansfield in an advisory role (referring to him as "the top silicon expert in the world"), then convinced Mansfield to stay for at least another two years to lead Technology; Lynch later noted that he had been hired to report to Mansfeld before even knowing what he'd be working on. It was, of course, Apple Watch, which had been conceptualized but not yet even reached hardware prototyping.Apple began realizing the potential of a watch wearable in 2011, and that evolved into an understanding that it would need to be more than an iPod nano strapped to the user's wrist

The timing of these events makes it clear that Apple began realizing the potential of a watch wearable in 2011, and that evolved into an understanding that it would need to be more than an iPod nano strapped to the user's wrist.

While iPod had started out as a Mac-tethered peripheral for syncing music and other content on the go, by 2011 it was clear that the entire future was going mobile, and that a desirable wearable product would need to do more than just carry music and do the same kinds of fitness tracking that a phone could do by itself.

The wearable iPod of the future would need to start off tethered to iPhone, and would need to perform key tasks better than an iPhone could by itself. As a watch, it would need to be able to compete for attention against existing fashion watches, not merely be a block of technology strapped to the wrist of a minority of tech enthusiasts.

Metamorphosis of the wearable iPod



Rather than incrementally developing iPod nano into a watch in public view, Apple reverted to selling an embellished version of its original iPod nano form factor and took its watch development behind closed doors. It developed a series of technologies required to release a new iPod-like wearable as a real watch, one that a broad spectrum of users would want to wear, rather than just a subset of early technology adopters.

That included materials and manufacturing capabilities used by the premium watch industry, along with the development of a series of bands spanning the gamut from fashionable and classy to casual and athletic, in order to draw broad appeal. By offering a range of watch band types in a shifting palette of colors, Apple could also create a cyclical new fashion-oriented set of accessories that Apple Watch users could regularly buy, far more frequently than they might replace their watch outright.

Apple Watch also leveraged the work already done to bring the Mac OS platform to iPhone. Just as iOS devices required a clean UI rethinking and an overhaul of how apps would work on a smaller, mobile, always-networked device, Apple Watch created new interface conventions required to deliver a wrist worn computer with a usable interaction model that could provide information at a glance. That was necessary both because it's tiring to hold your arm up for an extended period of time, and because of the limitations inherent in a battery-driven computer running a powerful operating system.

The original Apple Watch makes a series of engineering design choices intended to achieve all day battery life, while still supporting sophisticated features that basic iPods lacked, including the Bluetooth-based Continuity features that first debuted at WWDC 2014, just months before Apple Watch was launched.

The combination of high end materials, water resistance, heart monitoring fitness tracking and Bluetooth Continuity for remotely answering your phone, replying to text messages, sending Digital Touch, following Maps directions, getting notifications, transacting with Apple Pay and accessing Siri resulted in a product that generated significant interest at prices ranging from $349 to $1099 (not counting the high end, solid gold Edition models priced between $10,000 and $17,000).




The much simpler iPod nano had been selling for $129-149--in increasingly smaller volumes--back in 2011. In its first year, Apple Watch (according to Canalys estimates) sold 12 million units, comparable to the number of Macs Apple sold over those three quarters, or nearly as many units as the total number of iPods sold in 2014, the year before Apple Watch went on sale.

In fiscal 2015, Apple stopped reporting iPod unit sales, and began grouping them together with other products like Apple TV, accessories and the new Apple Watch. That same year, Apple's other products segment reversed its trajectory from a 17 percent annual decline to 20 percent annual growth, largely due to the reinvention of the iPod nano into today's Apple Watch.Apple's other products segment reversed its trajectory from a 17 percent annual decline to 20 percent annual growth, largely due to the reinvention of the iPod nano into today's Apple Watch.

Apple stopped breaking out unit sales within its Other Products category to prevent rivals from realizing the value of what it had done, making it harder for them to know what products they should be copying.

Apple's obfuscation has also been assisted by IDC, which predictably rushed to report that Apple Watch has low "market share" when compared against Fitbit devices that sell at an ASP of $88, and millions of Xiaomi Mi Bands, a "wearable" that sells for $25 ($13 when on sale).

Last spring IDC press releases outrageously claimed that the Apple Watch market entry generating $1.44 billion in a quarter was merely "within striking distance of the market leader," when Fitbit actually had revenues of just $390 million. It also claimed Apple Watch was about on par with Xiaomi, which had at most collected $77 million.

While apparently intended to make Apple Watch look bad, IDC's tireless work to emphasize worthless data while minimizing the most significant information in the press releases it generates for public consumption appears to have blunted rivals' interest in aggressively pursuing the smartwatch market, giving Apple more breathing room to dominate the real market while competitors seek to dump out large numbers of low end wrist strap "wearables" with little potential value.

Apple Watch a sign of a responsive, prudently risk taking company



Apple's executives--and in particular Cook--have famously noted that the company doesn't fear cannibalization, and instead embraces change rather than seeking to resist clear demand trends in an effort to maintain a status quo. It is well known how the company migrated its focus from iPod to iPhone, for example, and today it offers iPad Pro models without any apparent political infighting between an iPad group and a separate Mac division.

When it launched Apple Watch, many observers wondered why the company had spent significant efforts developing a single new product, one that didn't appear to have the same unit sales potential as iPhone or even iPad. Looking at the origin of Apple Watch, it becomes more clear that it is closer to being a revamped continuation of iPod than an entirely new concept.

Further, rather than being a huge, high risk, speculative investment, Apple Watch borrows heavily from Apple's existing core competencies and technologies, while also necessitating the creation of prerequisite technologies that benefit its other product lines, including Continuity and Apple Pay.




Apple Watch also taught the company how to sell a new class of products, one that is equal parts fashion and technology, and which requires a different type of retail experience. Those lessons will help the company venture into new markets. Automotive sales are far closer to the sales model of luxury watches than selling boxes of electronics.

And finally, Apple Watch holds true to the philosophy of Steve Jobs, who once stated, "I think if you do something and it turns out pretty good, then you should go do something else wonderful, not dwell on it for too long. Just figure out what's next."

Apple could have held onto the past and kept spinning its wheels introducing a broad portfolio of new, slightly different iPod models. Instead, it has moved on with a far higher tier of ultramobile device, one that casts a halo of luxury over its other products while tightly integrating with them, bringing the concept of a mobile pod into a more sophisticated and inherently more valuable market, while also pushing forward goals related to health and fitness.

Even if Apple Watch were only moderately profitable, it would already be an outstanding accomplishment and a strategic success. We actually know that Apple Watch has been far more than that however.

Swiss Watch industry annual sales ~$25 billion. First three quarters of Apple Watch sales ~7 billion..

-- Ben Bajarin (@BenBajarin)


Last year alone, it generated around $7 billion in revenue with high margins. That's comparable with the performance of Amazon Web Services cloud business, and by itself as a product is already far more valuable than the entire hardware business of Amazon Fire, Google Nexus, Alphabet Nest, or Microsoft Surface.

At its Worldwide Developer Conference next month, Apple will be introducing more information about the future of Apple Watch and watchOS, which we discuss in the article Anticipating WWDC 2016: what's ahead for Apple Watch 2 and watchOS 3.
bb-15patchythepirate
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Comments

  • Reply 1 of 38
    rezwitsrezwits Posts: 597member
    But the Watch doesn't play Crisis, so it's a flop for sure...(sarcasm)...
    cali
  • Reply 2 of 38
    icoco3icoco3 Posts: 1,455member
    ...
    Last year alone, it generated around $7 billion in revenue with high margins. That's comparable with the performance of Amazon Web Services cloud business, and by itself as a product is already far more valuable than the entire hardware business of Amazon Fire, Google Nexus, Alphabet Nest, or Microsoft Surface.
    ...
    How interesting...a "failed" product is more valuable than those other products that have been on the market for quite awhile.
    baconstangcornchipcaliradarthekatlatifbpmessagepad2100
  • Reply 3 of 38
    bb-15bb-15 Posts: 242member
    I enjoy these kinds of tech history articles a lot. From the history of the iPod (which began to be used as a watch), the development of a dedicated Apple Watch was inevitable.
    manfred zornpscooter63cornchipcalinolamacguyradarthekatmessagepad2100
  • Reply 4 of 38
    designrdesignr Posts: 386member
    bb-15 said:
    I enjoy these kinds of tech history articles a lot. From the history of the iPod (which began to be used as a watch), the development of a dedicated Apple Watch was inevitable.
    Same here. It's interesting to zoom out and get some larger perspective on what Apple has been doing and to connect the dots from seemingly unrelated stuff to where they are today and speculate a bit about where that may lead tomorrow.

    manfred zorncalibb-15patchythepirate
  • Reply 5 of 38
    NY1822NY1822 Posts: 561member
    Great article Daniel....! Very well written...
    especially your use of the word Obfuscation...
    keep it up
    edited May 2016 mike1calilatifbp
  • Reply 6 of 38
    SnRaSnRa Posts: 65member
    As a watch, it would need to be able to compete for attention against existing fashion watches, not merely be a block of technology strapped to the wrist of a minority of tech enthusiasts.

    Definitely!

    In 2010 we had wearable devices like Sony Ericsson's LiveView. A module that attached to a watch band, it used an AMOLED display and would connect with your phone to interact with apps and provide notifications (sounds familiar?).  Yet, this was certainly a device for enthusiasts at a time when iOS and Android had still been relatively young. 



    Despite having different bands (even some leather options), it still didn't make the device fashionable.  This is something Apple spent a lot of time trying to develop with the Apple Watch.

     
    edited May 2016 cornchipradarthekatlatifbp
  • Reply 7 of 38
    razormaidrazormaid Posts: 299member
    I enjoyed it too. I think the thing that's even more amazing... the Watch requires an iPhone to run it so for every watch there's an iPhone user too. Knowing how many iPhone users there are world wide once Watch becomes more accessible (understood it's purpose) the sales will go even higher. 

    I didnt buy one for myself because I use PowerBeats 2 for texting, phone calls, etc but I bought one for my othe half because he's a pharmacy manager and would not be able to use a headset at work. Also they don't allow the phones out in the pharmacy but with the watch I can find watch he wants for lunch, what time to bring it and of course the extremely important sports scores. LOL 

    I was waiting for second generation Watch so I'll buy the next one for sure 
    baconstangcornchipcaliradarthekatsteveaulatifbp
  • Reply 8 of 38
    SnRaSnRa Posts: 65member
    razormaid said:
     I think the thing that's even more amazing... the Watch requires an iPhone to run it so for every watch there's an iPhone user too. Knowing how many iPhone users there are world wide once Watch becomes more accessible (understood it's purpose) the sales will go even higher. 
    You've just described a limiting factor, the requirement of owning an iPhone.  That's not amazing.
    afrodrisingularitykingofsomewherehot
  • Reply 9 of 38
    zimmermannzimmermann Posts: 208member
    SnRa said:
    razormaid said:
     I think the thing that's even more amazing... the Watch requires an iPhone to run it so for every watch there's an iPhone user too. Knowing how many iPhone users there are world wide once Watch becomes more accessible (understood it's purpose) the sales will go even higher. 
    You've just described a limiting factor, the requirement of owning an iPhone.  That's not amazing.
    Well, it happend on me. I was playing around with a Nokia Lumia, not being very happy, but manageable. But there suddenly second hand was an Apple Watch on my wrist in a deal to good to be true. Guess what I bought a week later...
    edited May 2016 jony0baconstangcornchipsteveaulatifbp
  • Reply 10 of 38
    designrdesignr Posts: 386member
    SnRa said:
    razormaid said:
     I think the thing that's even more amazing... the Watch requires an iPhone to run it so for every watch there's an iPhone user too. Knowing how many iPhone users there are world wide once Watch becomes more accessible (understood it's purpose) the sales will go even higher. 
    You've just described a limiting factor, the requirement of owning an iPhone.  That's not amazing.
    I suspect this limitation will be lifted in the future.

    (Wow. I'd be fascinated to know what about my comment warranted a "Dislike".) LOL
    edited May 2016 cornchipcalinolamacguyhjmnlicoco3
  • Reply 11 of 38
    SnRaSnRa Posts: 65member
    designr said:
    SnRa said:
    You've just described a limiting factor, the requirement of owning an iPhone.  That's not amazing.
    I suspect this limitation will be lifted in the future.
    As in, the Apple Watch will be a standalone device? Or, that Apple will allow pairing with Android devices?

    I highly doubt the latter. 
  • Reply 12 of 38
    designrdesignr Posts: 386member
    SnRa said:
    designr said:
    I suspect this limitation will be lifted in the future.
    As in, the Apple Watch will be a standalone device? Or, that Apple will allow pairing with Android devices?

    I highly doubt the latter. 
    As the technology evolves and improves, I suspect it will move toward more standalone*. I seriously doubt they'd ever pair with an Android device.

    *Able to be used without an iPhone but enhanced when used with an iPhone.
    edited May 2016 baconstangbobschlobpscooter63calinolamacguy
  • Reply 13 of 38
    spice-boyspice-boy Posts: 640member
    Great article Dan. 
    cali
  • Reply 14 of 38
    SnRaSnRa Posts: 65member
    designr said:
    SnRa said:
    As in, the Apple Watch will be a standalone device? Or, that Apple will allow pairing with Android devices?

    I highly doubt the latter. 
    As the technology evolves and improves, I suspect it will move toward more standalone*. I seriously doubt they'd ever pair with an Android device.

    *Able to be used without an iPhone but enhanced when used with an iPhone.
    If they want to remove the limitation, they'll really need to be able to pair with the competition.  Even as a standalone device, I can't see many Android phone users wearing an Apple Watch that can't do something as simple as relaying a message from their phone.

    Standalone features are something that can be a benefit to a wearable when someone is away from their phone, or the wearable is uniquely positioned to offer a feature that cannot be done on a smartphone. I would see little incentive to willingly lose the pairing benefit that could be obtained from a competitor's 'standalone' wearable.


  • Reply 15 of 38
    designrdesignr Posts: 386member
    SnRa said:
    designr said:
    As the technology evolves and improves, I suspect it will move toward more standalone*. I seriously doubt they'd ever pair with an Android device.

    *Able to be used without an iPhone but enhanced when used with an iPhone.
    If they want to remove the limitation, they'll really need to be able to pair with the competition.  Even as a standalone device, I can't see many Android phone users wearing an Apple Watch that can't do something as simple as relaying a message from their phone.

    Standalone features are something that can be a benefit to a wearable when someone is away from their phone, or the wearable is uniquely positioned to offer a feature that cannot be done on a smartphone. I would see little incentive to willingly lose the pairing benefit that could be obtained from a competitor's 'standalone' wearable.
    Possibly. But I can imagine the watch becoming powerful enough to do a fair amount on its own. I don't know exactly what those feature are at the moment. But I have stopped underestimating Apple in this regard.

    cali
  • Reply 16 of 38
    I love the content of the article, but some parts are highly speculative. Specifically, I'd like to see the math around "$7B revenue in 3 quarters" and "high margin" statements.

    $7B revenue would imply ~14m unit sales t best and the estimates I've seen are between 10-12m units for calendar year 2015.

    On margins: In response to an analyst question on lower-than-expected gross margin forecast, during the fiscal 2Q15 earnings call, CFO said:

    "And also, we’re launching the Apple Watch. Apple Watch is not only a new product, but it’s a brand new category with a lot of new features, a lot of new, innovative technologies. And Apple Watch margins will be lower than company average."

    He made that comment when Apple Watch was priced $50 more than what it sells for now, so I disagree with the "high margin" comment.
    jonl
  • Reply 17 of 38
    mac_128mac_128 Posts: 3,316member
    designr said:
    SnRa said:
    If they want to remove the limitation, they'll really need to be able to pair with the competition.  Even as a standalone device, I can't see many Android phone users wearing an Apple Watch that can't do something as simple as relaying a message from their phone.

    Standalone features are something that can be a benefit to a wearable when someone is away from their phone, or the wearable is uniquely positioned to offer a feature that cannot be done on a smartphone. I would see little incentive to willingly lose the pairing benefit that could be obtained from a competitor's 'standalone' wearable.
    Possibly. But I can imagine the watch becoming powerful enough to do a fair amount on its own. I don't know exactly what those feature are at the moment. But I have stopped underestimating Apple in this regard.

    I have no problem imagining that either. However, the biggest problem with this "article" is that it is premature. The Watch requires BT headphones. And the advertised playback time from the watch is 6.5 hours, and Apple heavily disclaims that measurement -- your actual usage may vary. Compare that to the Shuffle -- 15 hours of playback time (30 hours for the Nano).

    So no, the Watch is not an iPod replacement at the moment. Unless people are OK with ONLY using it as an iPod, and only for less than 6 hours a day. 

    Add to that fact that the watch currently requires an iPhone for most other functions, so it's far more logical to use the iPhone instead.

    Does the watch replace the iPod at the gym and other uses? Yes. But even a couple of hours at the gym takes a significant toll on the battery life of the watch for the day. 

    Add to that, not everyone's into BT headphones. 

    The sad part about the watch, however practical Apple's decision, is that I say a gentleman on a plane wearing a nano watch, with wired earbuds plugged into it on his arm. And it seemed perfectly normal looking, not restricting his mobility at all. 

    So maybe when Apple removes the 3.5mm jack , and wireless headphones become the more affordable, lower powered, higher quality norm, then the watch can start thinking about advertising itself as an iPod replacement. Successor, yes. But until then, this is a losing argument. 
    edited May 2016 larryacali
  • Reply 18 of 38
    bobschlobbobschlob Posts: 1,074member
    "While ridiculed by many as a flop and often misunderstood as a product"
     You know, just the first few words of an article tell you. Succinct; on point; accurate.
    I'm such a DED fanboy.
    edited May 2016 radarthekatlatifbp
  • Reply 19 of 38
    razormaidrazormaid Posts: 299member
    SnRa said:
    razormaid said:
     I think the thing that's even more amazing... the Watch requires an iPhone to run it so for every watch there's an iPhone user too. Knowing how many iPhone users there are world wide once Watch becomes more accessible (understood it's purpose) the sales will go even higher. 
    You've just described a limiting factor, the requirement of owning an iPhone.  That's not amazing.
    GRIN you don't own an Watch I take it. If you did you'd understand how amazing it is to flash look at something and get computer style results 

    I guess you missed the part about my friend isn't allowed iPhones in the pharmacy which means both of us would have trouble sending a quick message. Or I could call the central Walgreens line -> then wait to get to centralized pharmacy-> then request to be transferred to his stores' pharmacy-> then wait for that call-> just to get his lunch order?  Instead he leaves his phone in locker and gets my texts (even phone calls) via his Watch.   Not to mention he gets to look up drug interactions through the RX App from his Watch when he can't get to a screen because they're so busy?  How would that work on say Fitbit?  I'm assuming you know how to do all that on Fitbit?

    so yeah... tethered to the iPhone (computer) yet super slim and small?  Yeah I think this pretty amazing we can do all that just from the watch 
    edited May 2016 baconstangcalibobschloblatifbpicoco3messagepad2100tdknox
  • Reply 20 of 38
    foggyhillfoggyhill Posts: 4,767member
    I love the content of the article, but some parts are highly speculative. Specifically, I'd like to see the math around "$7B revenue in 3 quarters" and "high margin" statements.

    $7B revenue would imply ~14m unit sales t best and the estimates I've seen are between 10-12m units for calendar year 2015.

    On margins: In response to an analyst question on lower-than-expected gross margin forecast, during the fiscal 2Q15 earnings call, CFO said:

    "And also, we’re launching the Apple Watch. Apple Watch is not only a new product, but it’s a brand new category with a lot of new features, a lot of new, innovative technologies. And Apple Watch margins will be lower than company average."

    He made that comment when Apple Watch was priced $50 more than what it sells for now, so I disagree with the "high margin" comment.
    14M up to now seems pretty much on target if you take 10-12M for 2015. It's hard to actually know the margins since most of the real costs of this thing are likely in manufacturing development and not the parts themselves. The good thing is that long term this should pay for itself many times over.
    bb-15latifbp
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