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The Critical Path #125: War of Attrition

Horace and Anders analyze the possible business models for Apple Watch, how it may be introduced, distributed, sold, and bought. What impact will the Watch have on Apple’s top and bottom lines? They further look into possible introductions for the rest of 2014. Horace sounds about to give up hopes on Apple TV.

via 5by5 | The Critical Path #125: War of Attrition.

  • stefnagel

    Apple TV will flow through the apps store eventually. What’s needed, as with apps, is a hit show to be an app. Here’s the diff: Apps are cottage industries; they can be built in the basement. Shows are too complex and costly to build at home.

    And it’s not getting cheaper. Now we have huge historical 10 episode costume dramas. Binging on Boardwalk Empire on Netflix IS the new TV.

    Here’s the crack in the wall: Talking head TV. When Joshua Topolsky was on The Verge, he showed he can light up the tube in a tubecast. He’s Groucho with an iPhone. Great talent like Joshua could anchor a successful “Tonight” show cheaply and profitably. Cus’ he is the show.

  • Isaac

    If Apple were to sell the Edition version in boutiques, you may be off in the price by a factor of 2. Retail markup in jewelry stores is notoriously high. Apple would need to allow them to have the same or at least similar markup if it is going to be attractive for them to sell it.

    • http://www.asymco.com Horace Dediu

      That makes sense.

      • Mordechai

        Jewelry markups are traditionally 100% at each level. (It’s called keystone markup.) So manufacturer sells to retailer at keystone, retailer then sells to the consumer at keystone. Therefore at retail actual cost of goods sold is 25%. That’s with high value jewelry, i.e. gold and precious stones. With costume jewelry the markup is even greater.

      • Sam

        I think the gold Edition will be sold in fashion boutiques which won’t will reveal the pricing except to serious customers.

        The type of places that don’t have prices listed on their clothes and other fashionable items.

        The cliche “if you have to ask the price, you probably can’t afford it”

        I think the gold Edition won’t have an official MSRP. That would be bad publicity for Apple in the short term. Internet rage backlash etc….

        On the other hand, this may be the only Apple product where Apple doesn’t limit the reseller’s margins or enforce a minimum advertised price, since no price will be advertised.

        Food for thought.

  • Dana

    Two points: The stainless model has a sapphire display, not just the the gold version so that raises costs it. The Apple Watch works only with iPhone 5 and up, so that reduces potential users.

    • http://www.asymco.com Horace Dediu

      Apple mentioned 200 million addressable as of launch date. I suppose that could grow with iPhone 6 growth.

  • Alan

    I think gold is more expensive than what you’re estimating. At $35/gram a 200 gram case is going to be $7000 of just gold. Gold is now around $1200 per troy ounce; I think it’s about 31 gram to a troy ounce. I don’t have much of idea of how heavy the case will be, but it it’s solid gold I think it’s going to be pricey.

    • weight

      Do you think the case of the watch alone will weigh 55% more than an iPhone 6?

      • Alan

        I thought the 200 was the number used in the podcast? Perhaps I misheard that number.

        At 42mm x 36mm x 12 mm thick the case would be 156 x 12mm around the edges. The back of the case looks to be about half metal and half the circular sensor area, so that’s 42x18mm, so in total 2600 mm^2. Thickness is kind of a guess, but maybe 0.2 mm? That would give 540 mm^3 of metal. Gold (pure gold) is 0.019 g/mm3, so we’ve got 10 grams or so.

    • http://www.asymco.com Horace Dediu

      200 grams? That’s not what I sensed as the weight. Also note that the case is not 24 carat gold but 18.

    • http://naofumi.castle104.com/ Naofumi

      I think it’s going to be less than 30 grams per Apple Watch. Note that the bracelet isn’t gold, nor is the back case. It’s just the frame on the top case and maybe a bit on the bezel.

  • http://naofumi.castle104.com/ Naofumi

    I did a bit of analysis of pricing of the Edition based on a tear down analysis that I found of a Gold Rolex.

    I think the raw gold will cost more than you estimate, but at the same time, I agree that Apple is more likely to use a markup based pricing scheme, making the price in the same range as you mentioned.

    http://naofumi.castle104.com/apple-watch-pricing-strategy-thoughts/

  • jameskatt

    My speculation:

    Base Prices:
    1. Aluminum Apple Watch = $350
    2. Steel Apple Watch = $1000

    3. Gold Apple Watch = $5000

    The Raw Gold for the Gold Apple Watch alone costs $2000.
    The Gold Apple Watch will compete against low end Rolex Watches.

    The Global Watch Market is worth $60 BILLION.

    If the average sold price of an Apple Watch = $600 and Apple sells 10 MILLION Apple Watches, then Apple will sell $6 BILLION worth of Apple Watches and will take 10% of the Global Watch Market.

    The watch market is much smaller than the cell phone market since much fewer people wear watches than carry cell phones.

    People wear watches as jewelry. As such, Apple should respect this and price their Apple Watch at the higher end of the market – with the low high end at $350.

  • jameskatt

    The Watch market is not the same as the Cell Phone Market. The Cell Phone Market is in a race to the bottom. The Watch market is not.

    The Watch market is traditionally split into cheap watches and the high end jewelry watches. Apple is competing not with the Timex or Casio end of the watch market, but the high end of the market. Apple is competing against the $500 Tag Hauers and the $30,000 Rolexes.

    The price of the Apple Watch will reflect this.

    • http://naofumi.castle104.com/ Naofumi

      As Horace mentioned in the podcast, whether the price will reflect Tag Heuers or Rolexes depends on whether Apple aims to be disruptive or not. In order to be truly disruptive, Apple could easily price the watch like they price smartphones, and still be hugely profitable, at a scale that luxury watchmakers can only dream of.

      It’s up to Apple to decide if they want to totally disrupt the watch industry or not.

      • http://idlebandwidth.com/ John Pollard

        Sir Ive, who might be in a position to know, seems to think it’s going to be disrupt.. http://nyti.ms/1t387bI 🙂

        My guess is also that there will be a very, very active upgrade and accessory business for the watch (battery, SoC, bands, sensor module) that would require a major rethink in a year or two for retail. Would they make the watch more user serviceable than the typical Apple product? Could the resin covered SoC and Battery upgrade be easily handled by a person at home? That in itself might be pretty disruptive to the Swiss model.

  • Roger

    I think $10 for the S1 sounds low. Judging from the size of the watch, the size of the S1, and the picture of the packages inside the S1, it looks like largest device is about 50 sq mm and there is one slightly smaller package and another 8 or so non-trivial size devices. We can assume that there is RAM, FLASH in there – we don’t know the quantities but we might guess 256 Mbytes RAM and 8Gbyte of FLASH – which pro-rated with the TechInsights iPhone 6 breakdown says $5.75 for flash and DRAM alone. So say at least $10 for components – now add packaging and test – and allow for poor yield from a novel assembly process. I wouldn’t be surprised if the cost were nearer $20 than $10.

    And then we have the key question of whether the S1 is replaceable. In fact this is two questions.

    1. “In principle, is the S1 a replaceable component?” I think [Disclaimer – I’ve not expertise here] the answer is “Yes”. The shape looks like it has been designed so that a person – a service technician – can easily fit it. The shape is keyed – see http://en.wikipedia.org/wiki/Apple_S1#mediaviewer/File:Apple-S1-chips.jpg. Would that type of keying be needed for a non-manually replaceable device?

    2. “Will a customer be able to have the S1 replaced (with an S2…) in their watch?”. I think so – certainly in the expensive watches. A $250 service which returns your $2500 watch cleaned, with a new battery and a new brain sounds cheap.

    Finally, talking of batteries. Perhaps the reason for not talking about battery life isn’t that it’s not very good but that it’s excellent? Just speculation but Apple are masters of chip design. With FD-SOI (now available from Samsung) you can get significant power/energy gains (2x) compared to bulk silicon so a combination of improved battery technology, careful design, energy efficient manufacturing process and small screen could give rise to great battery life. If Apple were going this route I’m sure they’d not want to make it public until they had to.

  • Jacob Willliams

    Hello Horace. It’s Jacob Williams. You talked about YouTube in this episode and I thought I’d give you and the other listeners a swelling of insight from a successful content creator. One who at least pays his mortgage with it. I believe that puts me at the top .001%

    For those reading this: I teach programming and software on my channel. Topics that are known to have 5-10 times the ad revenue. (Cat videos don’t make much money. It’s not really a targeted demographic.)

    80% of my revenue comes from sponsors and affiliates that I find myself. I have Tru-View ads on 90% of my videos. (These are the ads YouTube places. They’re the other 20% of my revenue) But the revenue doesn’t come close to the direct partnerships with companies that I mention within my video or include links to in my video description. I’ll also add that the value of sponsoring directly through me gives the sponsor 5-10X the return. That’s how targeted my demographics are. They’re also not paying the cost of a massive ad network. The middle man is removed.

    The reason a lot of YouTubers today quit is because they don’t have business experience and don’t know how to sell in-video sponsorships. I’ve had companies turn me down at first, then I emailed them data and told them “WHY” they should sponsor me. This led them to reconsider and eventually give me a chance. The result is them wanting to sponsor even more than I originally was selling.

    Most my revenue is residual on videos I made a year ago because they’re still getting views. (Did you bring up syndication?) I sell links to products and services. I put them in video descriptions. How I refer the viewers is to tell them to check out my book and product recommendations in the video description. This allows me to future-proof my videos. Since my videos have compounded growth over time. This is a trait most YouTube videos don’t have.) I have structured my content to have this characteristic. Long-tail is the game I play. I’m not trying to get any one-hit wonders.

    I’ve always approached YouTube as a numbers game. I spend a lot of time maximizing my RPV. (Revenue Per View) Just as Apple does with their products.

    My time is spent this way:
    90% optimization with SEO, design, outreach, and finding sponsors. 10% planning and creating content.

    Conclusion:

    I think a lot of content is being created by people who don’t know how to sell. People that grew up in a generation that downloaded a lot of free music. The truth is, if artists don’t monetize their content, the platform will. It’s not like value isn’t being transacted and money changing hands. Facebook makes a killing on what essentially is a bunch of people’s blogs. (A facebook post is technically a blog or micro-blog) Facebook walks away with everything. The “content creator” is renamed into a “user”.

    You mentioned that iTunes saved the music industry in a recent show. They did indeed. Music artists created a culture of, “I’m not in this for the money maaaan.” So Apple saw an opportunity and took it. In that case, Apple was kind enough to share a little. Meanwhile MySpace was raking in page views and ad revenue from artists posting free music on their Myspace pages. Which in reality, could be looked at as a software version of an iPod. An iTunes that people could listen to free music on while the artists never got paid. That was MySpace.

    This is why I believe YouTube has a hard time being taken seriously. Jerry Seinfeld said “show me the money”. But our YouTube version of Jerry Seinfeld has been convinced YouTube is a “community” effort. Calling something a community rather than an industry is a massive mistake. It infers doing things for free. For the goodwill. In the end, it ensures all the money goes directly to Google.

    Content is King. Platform is God.

    Attachments Explained:
    Image 1: Shows where and how I put sponsors and links in my videos.
    Image 2: Shows the performance since September for the sponsor listed in Image 1. (This is public data. You can actually see detailed analytics for that particular link by typing in the shortened URL then adding a “+” to the end of it. All Google shortened links work this way. You can see what countries clicks are coming from. What OS, what browser, what page ect. Cool stuff. It makes everything transparent for me and my sponsors. This tool alone makes YouTube Sponsorship better than many other options.
    Image 3: Shows the sustained compounded growth over time that my playlists get. That screenshot is for my Ruby series. The first series I did.

    • Space Gorilla

      “I think a lot of content is being created by people who don’t know how to sell.”

      Exactly. Selling is an acquired skill, you can learn it. It’s tougher than most people think to get comfortable with the concept of asking people for money. But once you get used to it, it’s not so hard. It takes work of course, but I think most people can learn how to sell reasonably well.

      • Jacob Willliams

        So true. People associate sales with pressure selling. But most of sales is offering a product or service people didn’t know was available. It’s my job to tell them why it will be good for them. If the product is as good as I claim, then it sells itself once I’ve made the introduction.

        “Good things found aren’t always sought.” -Someone

  • Bruce_Mc

    Network TV works like Google. The network makes money by selling the viewer’s attention to the advertisers. The viewer is the product, and the advertiser is the customer.

    The job network TV does is to maintain an efficient, effective delivery medium for advertisers. A potential disruptor of network TV must find a way to serve advertisers better, or find a different way to finance their product/service.