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Don’t Squash the Subsidy -- The Apple Watch's Success Might Depend on It

Will the watch become a staple like the smartphone, or remain a niche device? The answer hinges not on the technology, but on its accessibility.

Lauren Goode / Re/code

First-year sales estimates for the Apple Watch vary between eight million and 41 million units. That 33-million device gulf reflects widespread uncertainty about how the Apple Watch will fare in the market, and as a marketing channel. Will it become a staple object like the smartphone, or remain a niche device for diehard Apple fans? The answer hinges not on the technology itself, but on its accessibility.

This same question faced iPhones when they first came out, which is why smartphone subsidies and service contracts were the norm from the dawn of the smartphone era until only very recently. The only reason why anyone was able to get a $600 or $800 phone for $100 or $200 was because Verizon or AT&T paid for it, and the subscription model enabled the carriers to recoup the cost from the consumer in six months. Today’s consumers are addicted to their smartphones, so even as the major carriers do away with subsidies, we’ll still go out and pay full retail price, or divide up the cost in monthly payments.

Subsidies enable scale, and Apple has sold 700 million iPhones to date, largely due to those subsidies. As a result of that reach, as well as the power the App Store brought, iPhones are a powerful marketing channel. Mobile ad spend is soaring, and 75 cents out of every mobile ad dollar is spent on iOS. In 2014, Apple led in ad revenue by a wide margin, according to a study from Opera Mediaworks.

The iPhone is such a powerful marketing channel because of its scale, and the same principle will hold true for smartwatches. The Apple Watch is just as expensive as a new iPhone — a 38mm stainless-steel Apple Watch costs $549. The hefty price tag makes it prohibitively expensive for many consumers, which makes scaling difficult. Without scale, the Apple Watch will never become a viable marketing channel.

Mo’ money, mo’ problems

At its unveiling, Apple CEO Tim Cook described Apple Watch as “the most personal product we’ve ever made.” The device was conceived as an important companion to the iPhone that frees people from constantly checking their phones by making important information viewable with a glance. The big, overarching vision is for the Apple Watch to become as prevalent as the iPhone. In this scenario, Apple would be able to generate revenue from ads and marketing, and not just device sales alone.

However, the Apple Watch will never become ubiquitous (on its own) at its current price point. In the Harvard Business Review, pricing-strategy consultant Rafi Mohammed wrote, “based on what I’ve read so far, I’d grade the Watch an A for ambition and a D for pricing strategy.”

Apple is known (and notorious) for releasing frequent updates that send existing devices into obsolescence at a rapid rate. This strategy works on iPhones because of subsidies, and without which people would be slow to buy and upgrade. Why shell out $549 now, when a newer, better version will be on the market soon? Or why spend hundreds on an upgrade when your current version works just fine?

“The lack of subsidies on the Watch will make — or at least should make — consumers even more anxious about the cost of upgrades,” Mohammed wrote.

Can Apple drive adoption without a subsidy?

If the Apple Watch remains a niche object, it will never become a significant marketing channel. Yes, the potential for marketing on the Apple Watch is huge. Over the past few months, a flurry of articles has come out anticipating all the ways that the Apple Watch will “change” marketing by creating new opportunities to reach and engage consumers with “extremely contextual experiences.”

Considering the trend toward carriers phasing out smartphone subsidies, the prospect of an Apple Watch subsidy doesn’t look good. Verizon just announced that it will no longer offer contracts or subsidies to new customers, and AT&T recently did the same. T-Mobile eliminated contracts and subsidies more than two years ago.

The argument that the iPhone achieved popularity because of subsidies is valid, but admittedly flawed. The iPhone — and especially the iPad, for that matter — also significantly benefitted from a “killer app.” In this case the killer app was actually the App Store, which opened up the device to developers and spawned the $25 billion app industry. We’ve yet to see a killer app on the Apple Watch, and consumers might wait until there is one to adopt the device more widely.

For example, a Forrester Research brief said, “smartwatches are the perfect fit for marketers to deliver value in micro moments when people are traveling, jogging, commuting or in a meeting.” A ZDNet article gives the example of an app that reminds you to use your asthma inhaler when you enter a more polluted area. Or you can use your Watch to check in and open your hotel-room door.

Payments, geofencing and beacons, social media and health all present exciting opportunities for marketers. These opportunities are less about attracting new customers as driving engagement with existing customers. Marketers and advertisers will have to be innovative about their campaigns, but down the road, the Apple Watch could open up interesting new advertising revenue streams.

Marketing only matters at scale, and marketers can’t and won’t advertise on the Apple Watch if they are only going to reach a very limited group of people.

Without subsidies or a killer app, the Apple Watch will remain a luxury product without a broad reach. This means that all the hype about it being the “Next Great Marketing Channel” is blown out of proportion. Yes, there are exciting possibilities for what marketing on the Apple Watch could be, but they won’t turn into a reality unless, one way or another, more people start to buy the Apple Watch.

Kamakshi Sivaramakrishnan is the founder and CEO of Drawbridge, the leading programmatic cross-device technology company, and the first and foremost solution for cutting-edge cross-screen marketing strategies for Fortune 500 brands. Drawbridge was named the fastest-growing ad/marketing company in the world in the 2015 Inc. 5000. Named one of Business Insider’s “Most Powerful Women in Mobile Advertising” three years in a row, one of Ad Age’s “40 Under 40,” and an E&Y Entrepreneur of the Year Finalist, Sivaramakrishnan is an expert on advertiser-buyer connections in today’s multi-screen environment. Always an innovator, she left her role as lead scientist at AdMob (acquired by Google in 2009) to solve the digital advertising problem of cross-device identity. Reach her @kamakshis.

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