Apple’s Watch and The End of Innovation

20130112_ldp001In early 2013 the Economist lamented that we may never produce something as innovative as the toilet. Certainly they were right in some ways, as some early innovations provided massive improvements in the standard of living with very little effort, where as new innovations did not add the same kind return for effort. It’s an interesting article and goes on to show that our understanding of innovation and whether we face a plateau in our technological progress is more nuanced and convoluted than we may be given to believe.

But industries do face innovation challenges. At some point all the easy refinements have been made and then starts the window dressing, attempts to “tart up” existing things that are little more than distractions from the initial great idea. The Apple Watch fits that criteria perfectly.

Apple Watch

To be clear, the Apple Watch does look to be all the things that Apple excels at; high quality, simple interface and good looks. But the point of the watch is somewhat unclear. You can answer phone calls, follow your heart rate, respond to messages and see your calendar. But these were all things that you can do now through your phone with a level of ease so surprising that you wonder what kind of person imagines that accessing this information is still too laborious.

The answer is likely marketers, who both see the trend towards wearable computers, and declining sales from other high priced items. Apple is a technology behemoth with a dedicated fan base of willing consumers. But even willing consumers have limits on their credit cards. High priced items like the iPad have cornered the tablet market, but they have also seen declining sales. Priced similarly like a phone, but lacking the phone contract subsidisation means that every iPad ends up costing between $500 – $1000. That’s pricey if every three years you are expected to buy a new one.

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The Apple Watch then is likely trying to do several things. Boost the profitability of secondary devices beyond it’s iPhone division. Create a product with a lower entry point that people will be more willing to replace, while at the same time take a stab at a much smaller high end market with a Veblen good.

Ya, that's right. It says $22,000. Less useful than a phone, less gold than a Rolex and it needs to be charged every night.
Ya, that’s right. It says $22,000. Less useful than a phone, less gold than a Rolex and it needs to be charged every night.

But why own one? The first serious app for the apple watch is from Salesforce, the online CRM tool. Salesforce is already accessible from pretty much anywhere. You can log in from any computer and it has a very comprehensive app for all major smart phone platforms. So why would a wrist watch be the ideal place to offer notes, charts or contact information? Already people are wondering what the first “killer app” will be for the watch. I’m curious too.

What made the first iPhone great was that it made using the internet on a small device practical and easy. It was an innovative way to engage with a host of useful things that were previously outside of your reach when not in front of a computer. Apple opened a new market and ushered in a revolution. But eight years on and I am struggling to understand why you would sink any money into wearable tech, with its bad battery life, planned obsolescence and largely pointless existence.

Apple Stock

This should give investors pause. Apple and many of its competitors have done well by striving towards continuing improvements in the look and use of their products. But with each new iteration, we see less innovation and more refinement. The Apple Watch is an attempt to create something new that is actually made up of already existing technology. It doesn’t do anything better, and that should serve as a red flag to investors. As of yet there has been no truly successful wearable technology, neither in the form of glasses or watches. Apple hopes to change that with a more stylish and aspirational device. In the end however, it is a product likely to be crippled in three years by its own obsolescence. Whether that is an appealing device is up to consumers, but as an investor I wouldn’t want to make it a big bet in my portfolio.

The Failure Of Google Glass Is A Useful Warning To Investors

Google_Glass_with_frameLast week Google announced that it would not be proceeding with another round of Google Glass for 2015, meaning that the most ambitious experiment in wearable technology had come to an end. Google Glass has many failings, ranging from looking stupid to attracting angry mobs of people, but it did seem to be the vanguard of wearable technology. Wearable tech has attracted a great deal of attention, both from consumers and investors, but I have a feeling that it’s rise may be overstated.

For the most part wearable technology is a subset of the “internet of things“, the growth of cloud computing, mobile sensors and high speed communication between stuff. The most beneficial forms of this could be about smart city grids communicating with cars to smooth traffic flows and reduce congestion. In reality it is largely counting how many steps you take everyday.

Looking past the incredible number of terrifying elements about our privacy and data mining that go along with these devices, by and large most wearable technology hasn’t really taken off. Google Glass may be a high end flop, but the vast amount of wearable devices on the markets today have yet to win over big audiences. They remain largely niche devices with a high drop off rate. Where as people adopted smartphones on mass, many people have just shrugged their shoulders and moved on, while those that do buy into wearable tech often stop using it after a few months. This suggests that there is a disconnect between understanding what smartphones get right and wearables get wrong.

That gap is clearly frustrating tech companies, and it will be interesting to see whether Apple’s first wearable device, the Apple Watch, is able to change the pattern. But for investors the allure of the new as a reason to invest should be tempered, and excitement over the prospect of “the next big thing” and the importance of getting in on the ground floor may prove financially costly.

Take for instance TESLA Motors (TSLA: Nasdaq). Tesla may be a car company, but it is treated like a technology company on the stock market, meaning that it is currently trading with a ridiculous P/E ratio, close to 130x next years earnings. Put simply, if Tesla were to pay out all of its earnings to its shareholders it would take 130 years (given current earnings) for you to receive the equivalent value of what you paid for a share. That gives Tesla, a company that sells cars by the thousands a market cap similar to General Motors, a company that sells cars by the millions.

That’s crazy, but normal for the tech world. This has been exceptionally true social media sites like Twitter, Linkedin and Pinterest. All of them also trade well and above “normal” valuations, especially given that they don’t make anything.

The lesson for investors is to be cautious about technology companies. They come with a host of pitfalls and unique qualities that are frequently glossed over in the excitement of the new. Investors have been swept up before with the prospect of some great new device that can’t go wrong, but with some notable exceptions much technology often finds itself on the scrapheap of history. Or maybe we will all start carrying around smart glasses for every beverage