THE 0.001%

Apple and Samsung’s smartwatches are going to be way too cheap

Samsung’s Galaxy Gear smartwatch disappointed.
Samsung’s Galaxy Gear smartwatch disappointed.
Image: AP Photo/Gero Breloer
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In the $60 billion-a-year watch sector, most of the money flows to those who sell the most expensive devices: 0.6% of the watches shipped in 2012, with an average price of $4,285, were responsible for half the revenue of the entire industry.

That’s a big potential problem for aspiring smartwatch companies like Samsung, and eventually Apple. If they don’t tap into the ultra-luxury market, they’re going to miss out on most of the revenue and the healthiest profit margins of the industry that they’re invading.

“People buy watches for a variety of very complicated emotional reasons, of which telling time is often just a precept or an alibi,” says Bill Geiser, a former executive at Fossil and currently the CEO of smartwatch startup Metawatch. It’s a common refrain: watches are essentially fashion, a personal expression, and therefore useful as a mark of status or a gift.

In a recent conversation with an executive at one of the world’s biggest watch makers, Geiser learned that something like 85% of the $60 billion in global revenue generated by the watch industry comes from watches that cost more than $500.

Imagine Apple trying to sell an iWatch for more than an iPhone

It’s hard to imagine Apple or Samsung selling a smartwatch for more than their “hero” smartphones—much less for $4,285. And if only 15% of the revenue generated from the global watch market comes from devices under $500, it’s a far smaller market than some analysts have argued.

On the other hand, it’s clear that Apple will almost certainly expand the total size of the smartwatch market just by entering it. “[The iWatch] will be spectacular and they’ll sell a bunch,” says Geiser, who has worn a bluetooth-connected smartwatch since 2006, years before most people had even heard of such things. (When he was at Fossil he was responsible for early smartwatch collaborations with Microsoft and Palm.)

Of course, it’s also possible that Apple’s iWatch isn’t really a watch at all. CEO Tim Cook has been photographed wearing a fitness tracking wristband, and there are a huge number of potential applications for wrist-based wearables. Building something that sits on the wrist but isn’t a watch could be a smart move for Apple, allowing it to create a new category rather than competing with existing watch makers, some of which have spent more than a century building reputations as ultra-high end luxury manufacturers.

“The wrist is beachfront property,” says Geiser. “The watch market has been around for hundreds of years, and it’s going to be around for another 1,000. All we’re doing is taking this existing market and dragging it into the modern era… By and large a smart watch is still a watch.”