How will Apple regain its mojo? Watch

While Tim Cook has dropped hints that Apple Inc. (AAPL) is hard at work on a television to drive the next era of growth, the company’s wristwatch-style device, still in development, may prove more profitable.

The global watch industry will generate more than $60 billion in sales in 2013, said Citigroup Inc. analyst Oliver Chen. While that’s smaller than the pool of revenue that comes from TVs, gross margins on watches are about 60 percent, he said. That’s four times bigger than for televisions, according to Anand Srinivasan, a Bloomberg Industries analyst.

Apple, with its iconic brand and lucrative retail network, is poised to tap into the growing watch industry. Headway in the business would help compensate for slowing growth in other areas, such as iPhones and iPods. Apple’s stock has slumped by more than a third since peaking in September on signs of accelerating competition led by Samsung Electronics Co. (005930) and concern over how quickly Chief Executive Officer Cook is pushing into new products.

“This can be a $6 billion opportunity for Apple, with plenty of opportunity for upside if they create something totally new like they did with the iPod — something consumers didn’t even know they needed,” said Chen, who covers luxury- goods retailers.

The TV industry will generate $119 billion in sales this year, according to market-research firm IHS Electronics & Media. Using Chen’s margin estimates, a 10 percent share for Apple in each market would mean gross profit of $3.6 billion for watches, outstripping $1.79 billion for TVs.

Watch Team

Apple has a team of about 100 product designers working on a wristwatch-like device that may perform some of the tasks now handled by the iPhone and iPad, people familiar with the company’s plans said last month.

Features under consideration include letting users make calls, see the identity of incoming callers and check map coordinates, said one of the people, who asked not to be identified because the plans aren’t public. It would also house a pedometer for counting steps and sensors for monitoring health-related data, such as heart rates, this person said.

Apple seeks to introduce the device as soon as this year, this person said. Apple has filed at least 79 patent applications that include the word “wrist,” including one for a device with a flexible screen, powered by kinetic energy.

To accommodate the smaller screen of a watch, Apple could adapt its iOS mobile software to limit what information is sent to a wrist device, said Scott Wilson, a watch designer who developed a line of watchbands for people who wanted to use an iPod nano as a watch.

Lunch Date

“There’s no doubt the wrist is a valuable piece of convenient, glanceable real estate for viewing essential information,” Wilson said. “It’d be great to see information like, ‘Where are we meeting for lunch?’”

Past attempts to create smart watches haven’t gone far. Microsoft Corp. signed up partners including Citizen Watch Co. and Fossil (FOSL) Inc. in 2003 to build products that deliver traffic, sports scores and weather reports. The effort fizzled by 2008.

The timing looks better now. Having grown accustomed to using mobile apps in their everyday lives, consumers are more apt to try devices that make accessing data more convenient.

The start-up Pebble Technology plans to sell watches that work with Apple and Google Inc. (GOOG) software after raising more than $10 million on the crowd-sourcing site Kickstarter. Martian Watches and Meta Watch Ltd. are trying similar approaches.

Wearable Battle

Apple’s watch foray would also open a new front in its competition with Google — this time, in the area of wearable technology. Google is developing Google Glass, a computing device that resembles spectacles and is worn on the face. Owners of the glasses will be able to speak commands to snap photos, record videos or ask for directions, among other tasks.

Apple, more than any other company, has proved its ability to move into mature markets and remake them with new, easy-to- use innovations. Before Apple created the iPhone, cell phone makers were enjoying record sales of devices based less on technological innovation than on fashion and brand. Apple’s iPhone 5 was the bestselling smartphone in the fourth quarter, according to Strategy Analytics, and its mobile operating system commanded 21 percent of the market, according to IDC.

The watch business is experiencing a renaissance reminiscent of the cell phone industry before the iPhone. Shares of Fossil and Movado Group Inc. (MOV) have more than tripled since the end of 2009.

Stock Rally

Both companies enjoy gross margins greater than 55 percent, owing to brisk demand for fashionable watches. Swatch Group AG (UHR), the biggest maker of Swiss timepieces, surged to a record last month after reporting accelerating profit growth and expanded production capacity. Today, the shares fell 1.6 percent to 529 Swiss francs at 11:43 a.m. in Zurich.

Such gains lessen the incentive for companies to incur the costs and risks associated with bringing out more technologically capable smart watches.

Fossil, which built smart watches in partnership with Sony Ericsson as well as with Microsoft in the last decade, currently has no plans to do more, CEO Kosta Kartsotis said.

“We do have a number of things we’re looking at and watching,” he said on a recent conference call. Still, he added, conventional watches are “a much bigger opportunity.”

Besides brand and retail outlets, another advantage for Apple is its unmatched ability to drive down the price of components such as displays, batteries and circuit boards.

Ive Interested

Success in the watch business could provide some relief from gross-margin pressure that has dragged on shares.

A main concern is whether the company can find a product to compensate for slowing sales of the iPhone, which has gross margins of around 55 percent, roughly twice that of iPads and Macs. An Apple watch could carry margins that high, said Bloomberg Industry’s Srinivasan.

Apple design chief Jony Ive has long had an interest in watches. Besides owning many high-end models himself, he had his team visit watch factories and ordered boxes of a sports watch made by Nike Inc. (NKE) in the mid-2000s, said Wilson, who was then Nike’s creative director.

Coming up with a single watch to appeal to millions of consumers will test even Apple’s design mettle. While consumers are discriminating about which phone they carry, they may prove even more fussy about something worn every day. The buying public may opt for different types of timepieces, depending on the occasion — for instance, a high-priced Swiss watch for a black-tie affair, or a sports-oriented smart watch on weekends.

“Apple can merge fashion with function,” said Marshal Cohen, an analyst at NPD Group. “An Apple watch could triple the size of the watch business in a year or two. They have the opportunity to get everyone that owns a cell phone to go out and buy another watch.”

That’s where Apple can draw on its design chops, said Meta Watch CEO Bill Geiser, who developed the Fossil watches with Sony Ericsson.

“The watch industry has never been healthier,” Geiser said. “This opens up a new category of smart fashion accessories.”

–Bloomberg News–