Will iWatch Add $9 Billion To Apple's Top Line?

I admire the way Apple Apple used to innovate — that is to introduce a much better product into a huge existing market and then take a big share of its profits. Last time Apple innovated was in January 2010 when it started selling the iPad.

Some suggest that the iWatch is the next Apple innovation — yielding $9 billion in revenue. Is it? If IDC is right about the size of the market, the answer is probably not.

Before getting into the answer, what would an iWatch do? Based on a Morgan Stanley Morgan Stanley research note  it sounds like the answer is a combination of telling time and monitoring your health and physical activity. Morgan Stanley's Kate Huberty wrote: "In our view, Apple will introduce a device with more sensors, and better form factor and aesthetics than competing devices in the market priced at $100-250."

That would represent several times more than the size of the total market if IDC is correct. IDC claims that the market will reach a total of 19.2 million units in 2014. From there, the global market will grow at a 78.4% annual rate to 111.9 million units by 2018.

IDC estimates that the Pebble smart watch, Samsung Galaxy Gear, and the Sony Sony SmartWatch will become significant players and that it will not be until 2016 that the smart wearable market reaches into the millions of units shipping.

How big an opportunity does this represent for Apple? Using "historical penetration of past iDevice[s]" Huberty believes that the answer ranges between 30 million and 60 million devices in the first 12 months after it is introduced — which is between 1.5 and 3.1 times bigger than the total 2014 market if IDC is right.

A "Nixie" watch as worn by Steve Wozniak, co-founder of Apple, Inc. (Photo credit: Wikipedia)

Estimating the revenue for Apple depends on what price people would pay for the iWatch. One tiny sample size survey done by Piper Jaffray of 10 people about watches and wearables revealed that 14% would pay $350 while 30% would buy one that ranged in price from $100 to $200. Piper Jaffray also found that 41% would not buy an iWatch at any price.

Can Apple introduce a product that is vastly superior to the ones already on the market? Canalys's research on first quarter 2014 wearable device sales suggests that Apple will face fierce competition from many rivals.

Fitbit controls nearly 50% of the 2.7 million unit wearables market in the first quarter of 2014. Jawbone is another strong competitor while Nike's FuelBand — which suffered a 10 percentage point market share drop in the first quarter — is fading.

In the smartband segment — which amounted to under 500,000 units in the first quarter — Apple would need to wrest share from Pebble with 35% — beating Samsung whose share dropped to 23% in the first quarter and Sony, according to Canalys.

This leads to the question of whether Apple will indeed get $9 billion in revenue from the rumored-to-be-announced iWatch. The answer is that it depends on whether Apple introduces the product, how many units it sells, and what price people pay for it.

If we assume that people will pay $200, then Apple would need to sell 45 million of them to hit $9 billion. A $300 price would require Apple to sell a mere 30 million iWatches. If we assume that Apple starts to sell these devices in 2015 and apply IDC's growth rate — then the total market will hit 34 million next year.

In short, it looks like Morgan Stanley's assumptions for iWatch sales would require Apple to instantly take over between 88% and 132% of the total wearables market if IDC is right.

I do not think this is plausible in any market. To be fair, it's possible that Morgan Stanley has a better forecast for the market size than IDC.

Nor do I think that Apple will take a huge amount of market share within a year of launch from rivals that already make very popular products.

In short, the iWatch is all hype and no delivery at this point. I would be surprised if it becomes Apple's next innovation yielding $9 billion in revenue.