How much?! Apple Watch potential profits are staggering

Behind buying polls there are as many questions as answers, like: "How many people saying they will buy X, really will?" Oftentimes the number wanting something and actually getting it are usually much less than tallied results indicate. Considering those caveats, our Apple Watch buying poll nevertheless illuminates how the device could be hugely successful even from a small number of sales. I do mean big.

Among the more than 1,100 respondents, as I write, 19 say they will buy Apple Watch Edition, which price ranges from $10,000 (£6700) to $17,000 (£11,430). Assuming they all purchase and do so on the cheap, the math is easy: $190,000 (£127,700). Another 482 people want either of the other two models (Sport and standard Apple Watch). for $216,618 (£145,645) calculated at base prices of $349 (£234) and $549 (£369), respectively. The closeness of these two total dollar figures, possible profit margins behind them, and differences per-customer profits are ghastly.

Behind the Numbers

Analysis of any poll—relatively scientific, or not—can be tricky, and too often misleading. As such, before continuing let me lay out assumptions and limitations:

  • Our poll is live and people are still responding. To eliminate the hardship of constant recalculation, I lock the numbers in place: The aforementioned 19 for the gold Edition, 240 for Sport, and 242 for the standard model. That's from a pool of 1,125 responses.
  • All comparisons are made solely within these results, which foreshadow a possible trend among BetaNews readers that may or may not represent larger populations.
  • Profit margins are estimated based on what is typical for Apple and for the jewelry industry. Those applied to the high-end timepiece should be considered conservative.
  • Based on my experience reporting about Apple for 15 years and what is generally known about customer demographics, I assume that 1 per cent of buyers will chose the gold model, as the poll represents.

Let's begin by cutting the poll respondents' buying intentions several different ways. Revenue per customer for the 19 Apple Watch Edition buyers is easy: $10,000 (£6,700) each. For the others, combined: $449,42 (£302.17).

During fiscal quarter 2015, ended 27 December 2014, Apple reported gross margin of 39.9 per cent—up two points year over year. Guesstimating for the two-lower cost smartwatches, let's assume considerably less, 30 per cent. The number is adjusted in anticipation of start-up marketing, manufacturing, and distribution costs. Apple Watch Edition falls into the fine jewelry category, where, industry-wide, profit margins can reach 90 per cent. For the same reasons, let's use a lower number, 70 per cent.

Applying this rationale, the math is easy for the gold smartwatch, $7,000 (£4,706) gross profit per customer, versus $134.83 (£90.65) for each buyer of the other watches,

Sliced and Diced

Let's apply different reasoning to the poll data, by roughly applying average selling prices. Apple Watch Sport price range is $349 (£234) to $399 (£268). Averaging the two prices gives a reasonably assured ASP of $374 (£251) The standard model costs between $549 (£369) and $1,099 (£738). Average between them is $824 (£554). Let's arbitrarily assume $750 (£504), which I expect to be on the low side.

Rough rationale: iPhone's ASP, which during Apple's fiscal first quarter was $700 (£470). But the dynamics affecting jewelry sales are quite different from mobile handsets, such as appearance and bands versus smartphone storage capacities. Additionally, iPhone's full-price that carriers or customers pay is tighter—$649 (£436) to $949 (£638).

Something surprising from the poll: Statistically, the number of respondents planning to buy Sport or standard Apple Watch are evenly split. If this indicates macro trends, then the combined ASP will be higher than some analyst forecasts, which skew sales to the cheaper model. That puts the combined, estimated ASP averaged at $562 (£377).

As for Apple Watch Edition, there are 8 SKUs from $10,000 (£6700) to $17,000 (£11,430). Between them: $12,000 (£8,068) and $15,000 (£10,085) price points. My guess, for our purposes here: $13,000 (£8,740) ASP, or $500 (£336) less than the average between low and high prices.

Let's recalculate poll responses using these ASPs. For the Sport buyers: $89,760 (£60,350). Standard: $181,500 (£122,033) . Combined, at $562 (£377) ASP: $270,884 (£182,131). Edition: $247,000 (£166,072). Gross profit margin for Sport and standard would be $81,265 (£54639), or $168.60 (£113.36) for each customer. Apple Watch Edition gross profit: $172,900 (£116,250), or $9,100 (£6,118) per buyer.

Based on my experience, when working as a trade analyst constructing consumer surveys and polls, I expect less than 50 per cent—more likely fewer than one-third—of respondents will actually do as they say. The poll measures intentions, and little else. The full number of respondent calculations are for comparison, to demonstrate how a tiny number of Apple customers could generate tremendous revenue.

Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

Money, Honey

But let's assume for a moment that, as the poll results indicate, 1 per cent of buyers will choose the gold smartwatch. Strategy Analytics predicts 15.6 million Apple Watches will ship this year. Pre-orders start April 10 and sales two weeks later..

Some math then, from 1 per cent (156,000 units), using our estimated ASP and gross margin: $2.028 billion (£1.36 billion) revenue and $1.42 billion (£955 million) gross profit. My strong suspicion: 1 per cent is too low, and a larger number of buyers will choose gold. But we will see.

What about the other 99 per cent? Applying our estimated ASP and gross margin, revenue comes out to $8.68 billion (£5.83 billion) and gross profit at $2.6 billion (£1.74 billion). Obviously, the big spenders will be considerably more valuable to Apple, but masses matter, too.

Everything here is a series of educated guesstimates, but look like this: By these numbers, Apple Watch could generate $10.71 billion (£7.20 billion) revenue and $4.04 billion (£2.71 billion) gross profit during the remainder of 2015—and some sales estimates are considerably more bullish than those I used from Strategy Analytics.

For comparison, the fruit-logo company's last big product launch was iPad, on April 3, 2010. With a few more weeks of sales, the tablet generated $9.56 billion revenue for the year. If Apple Watch does better...how frightening is that?

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