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Ep 97: Apple’s incredible wearables turn into the next huge hit after the iPhone

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What’s going on here?

Apple reported a knockout quarter, showing growth in iPhone sales and promising numbers in China just a year after sales there fell off a cliff.

But the most interesting story at Apple is about the massive success of its wearables products, including the Apple Watch and AirPods. Apple may like to focus on its digital services business as its next area of growth, but wearables are turning into the sleeper hit at the company.

The promising signs of wearables

Let’s take a look at what CNBC learned about Apple’s incredible wearables:

Accessories are a bigger business than the Mac. 

  • Apple’s accessories category (wearables and other gadgets like the HomePod speaker,) generated $10 billion in revenue last quarter, which is now bigger than the Mac business ($7.1 billion).
  • It’s clear from Apple CEO Tim Cook’s comments that the vast majority of accessory sales came from wearable products.

Wearables are the size of a Fortune 150 company. 

Supply constraints hint at huge demand. 

  • Apple doesn’t know when it’ll be able to make enough Series 3 watches or AirPods Pro to meet demand. Last fall, Apple cut the starting price of the Series 3 to $199, and that seems to have driven a surge in sales.
  • The new AirPods Pro launched last fall to stellar reviews, making it another hot item over the holidays. 

Most Apple Watch buyers are first-time owners. 

  • Cook said that 75% of Apple Watch purchases last quarter went to first-time owners.
  • The Watch has matured enough and gotten cheap enough to attract first-time buyers.

More active Apple devices means more room for wearables to grow. 

  • Apple’s wearables work best when paired with an iPhone. Cook disclosed that Apple now has 1.5 billion active devices in use. It’s safe to assume active iPhones are approaching the 1 billion mark. 
  • The promising iPhone sales numbers Apple, driven by the new iPhone 11, is another sign Apple’s base of iPhone users can keep growing.

A shift in the story around Apple

  • While the company has been touting its services business, its new products in the category – Apple TV+, Apple News and Apple Arcade – are all too young to have a material impact on the services business.
    • Apple even said it doesn’t expect a material impact from Apple TV+,
    • Cook said the company is evaluating Apple TV+ based on the number of subscribers it has, not how much money it generates.
    • Subscriptions are a longer-term play as it builds out its content offerings. For now, it can build up its subscriber base by offering cheap or free plans, with the hope of converting those customers to paid users in the future.
    • In fact, Apple’s services fell $0.37 billion short of Wall Street’s $13.07 billion expectations. That revenue mostly comes from App Store sales, iCloud storage subscriptions and the hefty fees Google pays Apple to be the default search engine. It’s unlikely Apple’s newest content subscription products are making a real impact so far.
  • Meanwhile, Apple’s wearables business looks a lot like the iPhone business did when Cook took over as CEO back in 2011.
    • AirPods and the Apple Watch have set the standard for wearables that no other competitor has been able to crack yet, much like with iPhone.
    • Apple keeps showing us that it can leverage its huge base of iPhone users into new wearables customers, and they help keep customers locked into the Apple ecosystem. Now that iPhone sales have stabilized and there are at least 900 million in use, there’s a massive market for Apple’s wearable devices.
  • Apple also has an advantage over the competition. Microsoft, Google, Amazon, Samsung, and others have all taken stabs at wearables with middling success. 
Content source: Kovach. S. (2020) Apple’s incredible wearables: AirPods and Watch turn into the next huge hit after the iPhone. CNBC. Available from: https://www.cnbc.com/2020/01/29/apple-aapl-earnings-airpods-and-watch-turn-into-the-next-huge-hit.html [Accessed 29 January, 2020]

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