Yesterday, there were data estimates which showed that AAPL is very likely the largest watch 'brand' in the world, as measured by revenue. The analysis estimated that AAPL's trailing twelve months (TTM) of watch revenue ($5.246 billion) surpassed that of Rolex, whose annual revenue was estimated at $4.5 to $4.7 billion.

While AAPL's ascension to the top watch brand revenue generator in about 2 years is no doubt astounding, it raises some questions about the overall industry - specifically, whether the AAPL Watch has cannibalized traditional watch sales or has grown the revenue pie. In many ways, the question is much more analogous to the debate of how much impact Airbnb has had on the hospitality industry than the 'clear-as-day' impact of how much hurt Uber has put on the taxi industry.

  • Same Product? Much like hotels claim that Airbnb offers a different product, many traditional watchmakers have argued that the AAPL Watch is a completely different product that relies on silicon chips and a digital readout, rather than the hand-crafted precision of mechanical movements.

    In that vein, traditional watch connoisseurs would not consider the AAPL watch as an alternative to their mechanical watches, nor would a Millennial have the means to consider spending $7,000 on a Rolex. However, that is likely an extreme comparison. The more relevant question is whether a Millennial would consider an AAPL Watch over a traditional quartz watch in a similar price range, such as those offered by Fossil, Swatch or Michael Kors? It is this question that lends itself to a 'zero-sum game' where both products are viewed as equals and subsequent purchases are at the benefit of one, and the detriment of the other.
  • Creating New Demand? I don't have any research evidence to support this claim, but I would argue that a large percentage of AAPL Watch owners did not wear a wristwatch prior to buying a smartwatch. The smartphone has replaced many devices in our lives - the digital camera, the calculator, the flashlight, and for some, the wristwatch. Millennials, in-particular, have proven to be far less likely to wear a wristwatch than previous generations.

    So if you go back to the Airbnb analogy, many argue that Airbnb has fulfilled demand that was never being funneled to hotels. Examples include getting an Airbnb rental instead of staying with friends / relatives or renting a home on Airbnb for a bachelor party instead of renting a place on another alternative accommodations platform. So in those cases, Airbnb has actually expanded the lodging revenue pie, rather than eaten into it.

If the argument is that the AAPL Watch has added more revenue to the wristwatch industry than taken away from it, then the natural counterargument is the fact that traditional watchmakers have seen significant financial decline over the past couple years. However, it would be wrong to assume that this decline is a direct result of the emergence and momentum created by the smartwatch. An article published in the Wall Street Journal in August 2016 detailed the sales decline of the high-end watch segment, and outlined many factors underpinning that struggle, many of which were unrelated to the emergence of smartwatches.

Luxury watches are losing much of their luster. Blame a sluggish global economy and changing consumer tastes. Worldwide, Swiss watch exports dropped 16.1% in June from the year before. But exports to Hong Kong plummeted 29%, which retailers say is largely the result of a strong Hong Kong dollar and the Chinese government’s crackdown on gifting.
— "Hard Times for Luxury-Watch Dealers", Wall Street Journal, August 5, 2016

There is no question that the luxury watch market has been in decline, but the aforementioned article was written about a year after the launch of the first AAPL Watch. And while the article acknowledges the emergence of smartwatches as a factor in the decline, it points to a many other economic issues as the underlying cause of the high-end watch market distress.

Final Take

Just as hotels should be worried about the exponential growth of Airbnb, and must proactively develop strategies to combat its disruptive effect, traditional watchmakers need to do the same. While smartwatches have eaten into the revenues / profits of traditional watchmakers, the extent of that cannibalization is unknown because of the new demand that smartwatches have created and in some cases (especially at the high-end), the lack of comparable products.

In my opinion, the disruptive effect of the quartz watch on traditional mechanical watches that began in the 1980s is very different than what the industry faces today with smartwatches. Quartz watches were a direct assault on traditional mechanical watches predicated on pricing. Smartwatches are attacking traditional watchmakers on functionality - the AAPL watch tells the time, yes, but it is also provides a digital gateway to services through applications that enable a wearer to make payments, request a ride, track fitness activity, etc.

So the traditional watch industry will face much larger, and much different hurdles in dealing with smartwatches than it ever did with the emergence of the quartz watch. We have already seen a response from LVMH's Tag Heuer who debuted its 'Connected' smartwatch in November 2015 running the Android Wear OS. Breitling came out with its B55 Connected smartwatch in December 2015 and most recently, Swatch announced its plans to develop its own smartwatch operating system, which it would license out. The success of these 'pivot products' is largely unknown, but the sense in the industry is that they are merely band-aids to address the much larger wound that the AAPL Watch has punctured.