Whether the Apple Watch Succeeds or Fails, This Time Is Different
Easy: low success hurdles accompanied by a huge user base and loads of cash.
Scale Rules
Analysts vary widely over what the Apple Watch will generate in its first fiscal year, so consensus estimates range wildly from $5B to $25B, but with an installed user base of over 300 million iPhone 5 owners, Apple only needs to convert the 5% of their most loyal and bring revenues close to $10B, which would not only make Apple the smartwatch share leader but would dwarf the entire smartwatch category overnight!
With all the social momentum surrounding Apple and $160B cash in the coffers, Apple can buy whatever trial it needs to maintain a positive news cycle until they are crowned king of all technology once again.
Even if sales fall below analyst expectations, Apple’s R&D spending is close to an all-time low of 3% of net sales, lower in fact than it was when Steve Jobs was at the helm. So with low expectations, ridiculous scale, ambiguous expectations & social momentum, let’s go ahead and invest in AAPL.
But there’s a much bigger point to be made…
Extending the Product or the Brand?
Is that truly success? If all Apple watch does is create wrist-worn variations (improvements) on the iPhone experience to tap its current user-base and grow in low single digits, that seems like a line-extension to me–happens all day long in just about every category (yawn).
For the Apple watch to live up to both its brand and business potential, we would expect it to translate its brand narrative into the context of an existing category, impacting how choices are made in the category, and in this case actually garnering share-of-wrist from the traditional watch market, thereby signaling the onset of wearable “fashion-tech.”
I don’t actually believe Apple is thinking about this a siege of the watch market as much as an upgrade to the iPhone experience. It’s really a question of scale. Dominating the smartwatch category where Apple will undoubtedly win, is only a $1.4B industry (a rounding error for Apple) which would be a disappointing primary goal.
Of course, there is a broader, adjacent electronic watch market that represents about $9B, but the average watch price of those watches is so low, it puts Apple Watch out of the consideration set. The largest segment is the mechanical timepiece market, which holds the $30B Apple would need to source from–over half of which is Swiss.
Anchoring the Frame of Reference
The problem is that Apple has never sourced more than low single digits from an existing category in its first year of launch which would yield dismal results for Apple if that’s all they relied upon. However positioning this product as a ‘watch’ is material.
It anchors the audience’s frame of reference for evaluating the product, implies potential uses & alternatives. And most importantly, it establishes the context to amplify Apple’s brand narrative. For these reasons, it is critical that this launch be treated as a brand extension into a new category.
The Brand Manager’s POV
How should we, as brand professionals evaluate the Apple Watch extension? There are many ways to look at it, but across the board there is general consensus about two broad and sometimes competing criteria, the extension should build both the business AND the brand:
- Building the business requires a consumer proposition that is sustainable in the marketplace
- Building the brand requires that the extension reinforce the brand’s narrative, insulating its equity across all product lines
Building the brand without growing the business can sow the seeds of goodwill, but will eventually come under scrutiny as a low ROI activity. However growing the business without building the brand harvests the brand and depletes its value as an asset. We’ve already covered that the Apple watch will be valuable economically to the firm, but is it doing more to build the Apple brand, or to benefit from the goodwill the Apple brand already has?
This Time is Different
The Apple Watch hype will most certainly reinforce notions of Apple as innovator/disruptor, but what is most striking is how its brand constant has changed. You may have never heard this term, but you will recognize its function–because we all rely on it. For instance, if I tell you that Arm & Hammer is launching a new line of diapers, you could already tell me how it would be different than other diapers.
The brand constant is modeled on the science of social cognition. Generally speaking, it is the set of perceived attributes that MUST be present in order to readily identify something or someone. And as you might imagine there are very few things that are always true of a brand, across its entire product line–even rarer, still that those a will be unique to the brand.
This exercise above easy because Arm & Hammer’s brand constant is tangible & easily differentiated from the spaces it enters, but the brand constant can also be intangible, as with Nike; or can be intangible and non-differentiating as with many master brands.
Apple’s Brand Constant
Apple’s brand constant has historically been comprised both of its design elements and the human expression they enable. What is vital, however, is that this approach has always brought something novel to every category it enters.
In every launch, the competitive frame-of-reference was an overly engineered, technical category where specs were traditionally front & center and the user was not in control of the experience–but more importantly, Apple stood out.
If instead, Apple had an idea about extending into categories that were already defined by their creative expression (stringed instruments & art supplies), their point of difference would be weakened significantly.
Because of the category context Apple chose for its innovation, their societal POV (presumably to be liberated from the confines of the technocrats) played out in ads & in the culture like an allegory, driving choice at the store shelf, while their “equity” communication efficiently made a case for all of its products.
The Apple Watch Point of Difference
At Sentient we have discovered that the brand constant defines the brand’s architecture and heavily influences its innovation profile. Apple’s brand architecture is a choice-driving asset because every sub-brand (iPod, iPhone, Mac, etc.) differentiates from its broader product category on a consistent & predictable basis. With this watch launch, the brand’s point of difference is in question as it varies depending on whether Apple Watch is positioned as an electronic watch or more broadly as a watch.
Test for yourself. Do the antagonistic forces implied in the famous 1984 & Think Different ads even apply to the meticulous craftsmen of Piaget? How Apple frames this particular launch has consequences for their future brand perceptions.
But Does it Fit?
When a client comes to us questioning whether to enter a new category, it is phrased something like “Will my brand stretch into this category?” Or “Is there a brand fit?”
We used to research these questions directly as most consulting firms might, however with access to over 100 Million unconscious perceptions about brands, we’ve detected patterns suggesting that these questions are too general to ask explicitly.
Successful Category Extention
To simplify what is actually going on, there are two primary considerations that point to the successful business performance of a category extension:
- CREDIBILITY: Perceived ability to make a quality product provides entrée into the consideration set
- NOVELTY: Clear distinction about what will drive choice either for or against the product
One of the most intriguing facts about these two metrics is that they are usually inversely correlated. The more Credible categories are those that are more similar to existing products, whereas Novelty is more pronounced in distant categories that seem far afield from a brand’s expertise. In Sentient’s Brand Consulting business, our efforts typically focus on de-coupling the two, so that both aspects are an advantage.
If I could boil these concepts down to a few simple questions for Apple they would be:
- Does the consumer believe that Apple would have the expertise to make a quality watch? How about a quality electronic watch?
- Is it easy to infer which Apple characteristics will be introduced to the watch category? (vs. which will be consistent with other watches.)
- To what degree do those unique differences serve as an advantage/disadvantage in the watch category?
The Key Question
On the question of whether Apple is credible as a watch-maker, the answer is a solid yes – IF we’re talking about electronic watches, but we should investigate whether Apple has the expertise it needs to compete directly on the category requirements for a Swiss timepiece.
In regards to novelty, it’s likely that the new characteristics Apple will introduce to the category are so transformational that they render the watch almost unrecognizable. It’s probably fair to assume that excellent user-interfaces & superior apps compare favorably to electronic watches, not to mention mechanical watches, where these types of features are so beyond current category requirements it seems almost silly to compare.
Are the Trade-Offs Worth It?
Yet, while the characteristics of mechanical movement and artisanal craftsmanship are easy enough to part with rationally, there is an intangible, but intuitive aspect to Swiss timepieces that is borne of exclusivity and status. Some of Apple’s novelty betrays that notion. While there is status for being a first-to-own and a social payoff for being in the “in-group,” there is still a significant trade-off in the type of social signal that is facilitated by the watch, if Apple is trying to source share of wrist, from the traditional watch-owner.
Whether Apple’s distinct benefits are sufficiently compelling to overcome the status trade-off with a sufficiently sized target is something that must be measured. And while measuring something so slippery as status or self-affirmation seems difficult, it’s how humans make choices & it’s the most glaring outage in brand consulting & research . . . which is why quantifying the intangible is Sentient’s core business.
Apple’s Brand Challenge
Building both the brand as well as the business, requires an approach that both reinforces the brand’s narrative and amplifies its consistent point of difference. And if the Apple Watch is framed within the electronic watch market, it likely has the same unique advantages as it did entering the cell phone market. However if it sources primarily from this category, as we have noted, scale is the enemy.
If instead, it is framed within the larger market, which as we’ve noted is distinguished by craftsmanship of Swiss mechanical time-pieces like Rolex or Tag Heuer, Apple’s design elements are certainly not as distinct or advantaged.
How about the other side of Apple’s Brand Constant, namely the ability to facilitate human connection & expression? Apple certainly can do this better than Patek Phillipe, but are these things drivers of watch choice? Traditionally the self-affirmation & social status conferred by a “power-watch” are far more important criteria, which have been resistant to increased functionality since Pulsar first launched the first calculator-watch in 1975.
Can Apple Change the Paradigm Once Again?
The key question is can Apple change the paradigm once again? It must if it intends to build the business and the brand. To be successful as it has been historically, Apple would leverage its share of voice with its core audience to re-frame the basis on which the watch category should be assessed. To do this, it may need a page out of the old playbook–namely re-defining “power watch.”
The old Apple might undermine the status-related benefits of mid-priced mechanical watches to a more progressive audience, leveraging “in-group/out-group” marketing to juxtapose the type of person that wears a watch to elevate themselves over others vs. one that connects them with others.
As a wearable line-extension of the iPhone, Apple will be the smartwatch leader & generate billions of new dollars, but to deliver the growth warranted by a company of its size it must break the wearable tech boundary and extend its brand to capture significant share of the watch market.
It should noted that visual design and engineering is not a compelling advantage vs. a Rolex, Cartier or Breitling, but it should leverage its brand constant (human connection & expression) to re-frame the criteria on which watch decisions should be made, or alternatively just be ok with hyping an accessory to the iPhone in order to harvest another $600 from its own loyalists and enjoy spending its extra $10B.
