In the interests of learning from today…
Last night at 12:01 PDT, I bought an Apple watch without trying it. I bought it as an investor, and made a trade for the long term to buy into Apple even further when Apple initially dipped this morning. But I know I don’t need the watch as a consumer. And, you likely won’t either. So what is my reasoning for buying it and investing further in Apple? And what might we learn from this moment in tech?
A balanced investment thesis
Making a VC investment, I listen carefully to the entrepreneurs and potential customers, form a vision for the future market and a specific (usually very long term) time horizon for making an investment return. Then comes the hard work of analysis. And that starts with a balanced view of being highly skeptical and finding equal reasons to champion the investment.
Normally I’d specifically do my own diligence on a company starting with the team and their backgrounds and value proposition to address the market opportunity. In this case we’re a bit beyond that (!) and there are many informative reviews of the Apple Watch out now that we’ll use as a proxy. They are all pretty mixed. Some suggest the watch as a cool fashion accessory, others hail it or pan it as a V1 gadget, and yet others question the social challenges of another device to interrupt our lives.
I’m not qualified to add to these reviews, but I’d come out as a balanced skeptic and champion, just as I typically would when making a new venture investment. That’s really when the fun begins. So here are a few of my favorite frameworks to use as you consider the future of the Apple Watch.
Is it a dessert wax or a floor topping ?!
That’s what we’d always say when someone tried to combine things and neither was as good as the original.
Apple is certainly taking a watch and combining two new functions with elegance and apparent accuracy in a heart rate monitor and a pedometer. It’s taking on the old Polar straps and Fitbits.
As I looked at my prized Jaeger in the background, I was reminded, replacement sales are tough.
Is it for you? (Actually 4U?!)
My acid test for new products as an investor is around 4Us: How Unworkable, Unavoidable, Urgent and Underserved is this? Bottom line:
“What can you do with it that you simply could NOT do before that makes this indispensable?”
That’s why I’m such a big investor in Cloud Computing, because there are now so many things that would be impossible without the cloud. They range from the simplicity of synchronizing your calendar to the power of using Uber through location, communication, and payment cloud services. Today the Apple Watch is simply possible because of the cloud, but really relies on the iPhone significantly for things like GPS.
Yet in the future, just as the iPhone has replaced standalone devices such as Phones, Cameras, GPS, Flashlights, Voice Recorders etc, the watch will offer the same capacity for change as more sensors are added and 3rd party applications leverage the combined functionality.
So in a consumer world the 4U’s framework can require more nuance, as things can be more grey…
It’s not Blac and White
One of the frameworks I use in my Startup Secrets workshops is to help understand the difference between Latent Aspirational needs such as for fashionable clothes and watches (!) with Blatant Critical needs such as safety and health. For more on this, see building a compelling value proposition.
Using this framework it’s pretty clear to me that however you evaluate the Apple watch today there is no killer app that makes it blatant and critical — but I certainly see a future where it could be just that.
I could try to argue that giving one to your elderly parent to continuously monitor their health, activity and movement might make it blatantly obvious how valuable and possibly critical the Apple Watch could be. Dependability, cost and lack of applications probably all make that a stretch. However, all of those things will be addressed in time by the inevitable advances in technology. And, most importantly, the great entrepreneurs who have made the apps for the iPhone and iPad indispensable will do so again. As an example, just today, Dexcom announced the first ever continuous glucose monitoring solution on the Apple Watch.
Another framework I love to use more particularly with B2B companies building their value propositions is the gain/pain ratio: Is the gain your customer will receive going to be an order of magnitude greater than the pain of adopting it? And will that overcome the inertia to simply do nothing, or continue with good enough current alternatives? See here for more depth on this topic.
You’ll be the judge when you try the Apple Watch, as I did today, and worked through all the apps. More importantly I enjoyed watching people’s reactions to it, and asked those that were pre-ordering what compelled them. Many had no good answer, indicating it’s clearly a latent aspirational purchase. And that’s important to pay attention to, as it reminds us of the power of Apple’s brand, their marketing and how it can influence our desires when it comes to discretionary spending. (For more on strategic marketing for startups including branding see here)
But as regards the Gain/Pain ratio, those that were not buying, gave telling responses…
It certainly doesn’t tip the Gain/Pain ratio. it’s not an order of magnitude better than the alternatives. And the clear Inertia and risk is not Apple, but that it’s a Version 1.0 that isn’t a blatant critical need and will certainly be replaced – as that’s part of Apple’s business model!
So why have I already bought the watch? I buy one of pretty much anything Apple makes because I have been an Apple investor for well over a decade. And as anyone who knows me will tell you, I’ve recommended it to qualified investors to hold and even write options to cover them through the sometimes wild ride.
The Apple Watch is another classic case of a latent aspirational product that will eventually become adopted as blatant and critical for certain applications like health. And I look forward to investing in some great entrepreneurs who’ll bring these opportunities to life. In time it will change from being a dessert wax / floor topping challenge to a magical combination of functions at an irresistible price that can do things that were previously impossible.
I could tell you much about the analysis I’ve done on Apple that caused me to take advantage of the initial stock dip today. (Start by backing out their cash before you even get into things like the PEG ratio, but see the disclaimer below.) The bottom line is that you have to be a long term investor as initially it’s unlikely Apple Watch will have any more than a fractional impact on Apple’s financials.
However it will add to the “halo effect”. Between your Mac, iPhone, iPad, Apple TV, Apple CarPlay and now Apple Watch are trillions of data collections, billions of connections, hundreds of millions of users, millions of apps and thousands of accessories that are reinforcing the Apple value chain and building the defensibility of the ecosystem. This is also the same ecosystem that will enable Apple to perfect version 2, 3 and beyond of the watch. Watch this space is all I can say!
So just like the iPhone and iPad before it, it’s proof why as investors we have to be both skeptics and champions, with a vision of the future. (Click to Tweet).
As promised I’ll give away my Apple Watch
As always, I look forward to hearing your thoughts and comments to help us all learn. And I will be giving away the watch I ordered (depicted below) just as soon as it arrives. It will go to one of you who makes the best comment, for/against argument, or shares their thoughts on what we can learn from this fleeting moment in tech time.
I purposely did not make a financial rationale for why I’m an Apple investor. There are many better qualified analysts than me to do that and I specifically do NOT want you to take my opinion on Apple as an investment and would disclaim any and all such action. I simply saw this as a timely opportunity to bring some of my simple frameworks to life in a tech moment that will be fun to discuss and look back on.