Apple Watch and the Hierarchy of Needs

You will agree, my voracious reader, I am not a product reviewer. For this very reason, I mostly refrain from publishing any reviews of products I have purchased. That isn’t to say I don’t have strong opinions about those products (ask my friends, they will attest), but simply that I do not publish them on this site. Let us leave the reviews to our more adventurous writers. Instead, we aim here to understand the hidden complexities that are not often talked about in the contemporary technology and business press. On today’s agenda - the Apple Watch. 

As you so astutely recall, I have written about a few scenarios the Apple Watch can take upon its entering the market. For your convenience, I have summarized those scenario below:

1) It can flop, and Apple will abandon efforts.
2) It can be a semi-successful product like the iPad.
3) It can be extremely successful like the iPhone. 

Well, as of last week, the Watch became available for preorder, as well as up for display at your nearest Apple Retail locations. Of course it is still too early to tell which scenario the Watch will take, but as of most recently, I have thought of some additional complexities that will undoubtedly affect the success of the Apple Watch. 

The Watch, and the Hierarchy of Needs 

In a 1943 paper titled A Theory of Human Motivation, Abraham Maslow proposed a psychological theory called the Hierarchy of Needs (HoN), which aimed to describe the patterns of motivation us humans go through. Like any psychological theory, the HoN is imperfect and met with heavy criticism. Despite this, it is still commonly taught in most psychology classes and remains as well regarded as a theory may be. For your double-fold convenience, I have reproduced Maslow’s hierarchy below.

With this hierarchy in our retinas, let us begin to answer some questions. First, where do we think smartphones belong (note: there is no wrong answer, only more correct answers). If you asked your writer, he would answer that smartphones started at the peak of the pyramid (“Self-Actualization”), but have descended one level down to “Esteem”. As you descend down the pyramid, the importance of each step grows until you reach “Physiological” needs such as food and water. We cannot live without those items, making them of the utmost importance. Smartphones started at the top of the hierarchy because their utility went from little to great; their impact on our lives followed the same trajectory. 

It is still possible to live without a smartphone, but increasingly, that life is not worth living. I jest, of course, but the importance and value of the smartphone in the life of the average human continues to grow with each new iteration. Deviation from the “Esteem” step, on which I currently place smartphones, leads to helplessness, a lack of respect, and to weakness. Imagine traveling to a new country without a smartphone. Most likely, you would get lost - Helplessness. Alternatively, what if someone told you they don’t have or cannot afford a smartphone? Would that person be given the same respect as a smartphone owner? Lack of respect. Finally, picture yourself doing a group project for which you need to Google something. Without a smartphone, you are helpless. Weakness. 

If you are thinking these examples are cruel and not perfectly symmetrical to the real world, you would make a solid argument. But it is impossible to deny the rise of the smartphone in our daily lives, and its downward descent on the hierarchy of needs. 

Are you hungry on the day the Dow Jones Industrial Average hits its peak for the year? Probably. What about on the day it falls eight percentage points? Still, you’re probably hungry. And if the market totally plummets, leading to a full-fledged depression. Still, you have to eat. Maslow’s HoN shows that the physiological and safety needs must always be met; the alternative is death. For this reason, companies in the business of selling food, water, and shelter are not as hard hit by the impacts of the economy. This is in stark contrast to companies in the business of selling luxury items such as cars, clothing, and perfume. The hierarchy of needs allows us to gauge the relative importance of these products in our lives, and how the economy and human tastes will affect them. The lower the product is on the hierarchy, the less affected it will be. 

Let us circle back to the iPhone for a minute, which sits on the second to last step. In the case of a market downturn, do you think consumers would still purchase smartphones? Well, you might say, it depends who the consumer is and how bad is the market crash. Your answer would be precisely right. The rich and less affected would still upgrade their phones every year, as would the working middle class, since they would probably require the smartphone for work. It is entirely plausible, however, that the less fortunate, poorer demographic would eschew upgrading their phone this year. If things get really bad, they might even cancel their contract and go without a smartphone. And since the smartphone is on the second step, esteem, it would be hit less hard than the products at the top of the pyramid, self actualization. It isn’t too hard to imagine a future where smartphones will descend further down the pyramid, into love and belonging, and thus be further insulated from any market movements. 

Finally, we have arrived to the point of discussing the Apple Watch, and where we think it fits within this hierarchy. We can quickly dismiss the Apple Watch from the physiological, safety, and love/belonging steps, since it is not necessary for survival, safety, or belonging. That leaves us with esteem, and self-actualization - the least fundamental needs a human being requires. As you recall, I placed the iPhone on “Esteem”, which is the second to last step. I now ask you to pause and think for your own, omnivorous reader: where do you think the Apple Watch belongs? Once you’re done, return your gaze here and let us continue.

If you placed the Watch in the “Esteem” tier, you expect to be provided with the same value, utility, and prestige as the iPhone. Otherwise, you chose “Self-Actualization”, placing the Watch on the top tier of the hierarchy - a tier which supposedly results in the realization of a person’s full potential (who knows what that means, exactly?).

Despite the cryptic definition of “Self-Actualization”, your dear writer believes the Watch fits in this tier. The utility and cultural value of the smartphone reaches far wider than the smartwatch (at this time); in most developed nations, you will not find many people without a smartphone. The Watch, as it exists today, is a luxury item assembled for prestigious wrists. It is a fashion statement just as much as it is a fashion accessory. The value it provides is ancillary to the value of the iPhone. Alone it does little. If you’ve got food in your fridge, a house and a spouse, respectful co-workers, and a smartphone, the Watch is the last remaining step to your actualization. It does not come before those items, however.

If you feel philosophically enlightened from our discussion of the hierarchy, I hope too you will also feel logically and realistically liberated soon. Given our placement of the Watch in “Self-Actualization”, it is the least critical element to our existence. As such, it is a product that is least insulated from market movements. If an economic disaster were to strike, the Watch would be the first product to have its sales hurt. Therefore, the future success of the Watch is heavily correlated with the movements of the economy; when the economy slows, Watch sales will slow. When the economy speeds up, Watch sales will follow. 

The Watch, more than any other product in Apple’s portfolio, sits highest on the hierarchy of needs. It is simultaneously the least fundamental and the most desirable product a person can dream of. Consequently, Apple Watch sales will be predicated upon the buying power of consumers - which itself is derived from the economy - more than any other product Apple has recently released. And that, my friends, is as close to a product review as I will come to.

Apple Watch: The Good, the Bad, and the Ugly

Apple has become one of the largest companies in the world, which means every move the company makes gets thoroughly analyzed. Since I began following Apple in 2007, I recall analysts predicting that the iPhone, the iPad, and every update to those products will be a failure. In order to call a product a failure, one must compare it to a similar product. Analysts called the iPad a failure because they expected it to sell as well as the iPhone, which would never be the case. I am sure that while designing the iPad, Apple knew this too. iPhone sales are so great because they are practically a necessity, they're subsidized by carriers in the U.S., and provide unbelievable value for the price.

The iPad never had a chance to enter a market as large as the iPhone. In the past few quarters, iPad unit sales have been slowing. They have slowed so much, in fact, that Apple sold more iPads in every quarter of 2013 than 2014. My explanation the declination of the iPad is that it was never backed by the full faith and credit of Apple. The iPhone was always their number-one product, and everyone the iPad got just piggybacked off the iPhone. A smaller market for tablets, and a lack of effort from Apple is what significantly slowed iPad growth.

This post, however, is not about the iPhone nor the iPad. It's about Apple's new product - the Apple Watch. I began with a brief background of the iPhone and the iPad just to explain the basic reasons for why the iPhone is so popular, and why the iPad is not.

There is no shortage of Apple Watch predictions on the web. I do not aim to regurgitate any of them. I will simply list some thoughts, and you can do the thinking on your own.

  • There are many people still working for Apple that have been there since the original iPhone. Many of them stayed on the same product. That is, they've been working on some element of the iPhone (hardware, camera, Safari, Mail, etc) for the last few years. Sometimes they join a different team, such as switching from working on the Mail app to the Core OS, but they're still working on the same product, the iPhone. Sometimes they get transferred to work on the iPad, but this is just a side project for them. Unlike the iPad, which was a half-hearted effort, many original iPhone engineers and designers are now working full-time on the Apple Watch. That does not mean it will be a successful product, but it does mean it's getting Apple's effort.
  • Related to Apple's effort in the watch are the people hired to work on it. There are many. I will name some of the more well-known hires. Kevin Lynch (previously CTO at Adobe), Angela Ahrendts (she's in charge of Apple retail, but her fashion background undeniably helps), Marc Newson (albeit working part-time), Patrick Pruniaux (previously VP of Sales at Tag Heuer), Jay Blahnik (fitness consultant), Michael O-Reilly (previously VP at Masimo), and many others involved with medical sensors. I don't recall as many experienced hires coming aboard to work on the iPad.
  • There are one of three paths the Apple Watch can follow. First, it can flop, and Apple will abandon efforts. For the watch to flop, there it must either be a bad product, the competition must be better, or there is simply no market demand for it. Historically speaking, Apple is not known to design bad products. One can argue that Apple has lost its way and will design a bad product, but not much evidence supports this theory. As I've written previously, designing a smartwatch is extremely difficult and expensive, and not many companies can undertake such a herculean effort. The major players in the smartwatch space so far are Fitbit, Jawbone, Pebble, Motorola, Samsung, Garmin, Microsoft, and a handful of others. I don't see any of the smaller players competing effectively against Apple, but a better smartwatch from Samsung or Microsoft is something Apple should be thinking about. The smaller players can, however, compete on price by offering cheaper options. This can be a disruptive technology in the future, but not in the short term. Finally, there may simply be no demand for smartwatches. I do not have billions of dollars to spend on consultants and market research, so I do not know how the market will react to a smartwatch. But I do know that Apple has billions of dollars to spend on consultants and market research, and I can only assume they did some sort of research before beginning work on such a large project. Market research can be wrong, and Apple may have found a market where none actually exists (or is too small to matter), but I wouldn't bet on it.
  • It can be a semi-successful product like the iPad. Being the risk-avoidant person that I am, if I had to take a bet to predict the outcome of the Apple Watch, this is the option I would choose. But I'm not a gambling man, so I wouldn't even be playing this game. In the business, this option is what we call a hedge, since it covers the bases if the Apple Watch is a flop or a success. Billion dollar companies are not usually huge risk-takers, and Apple is the epitome of a company that avoids or reduces risks. For the Apple Watch to be a semi-successful product, multiple things can happen, either concurrently or alone. The Apple Watch may not be a bad product, but it may not be amazing either. It may end up being just a decent smartwatch. Technology and smartwatch aficionados may be the only ones to purchase it, which will stimulate reasonable sales volume. Not enough to call it a success, but enough to cover the expenses of designing, manufacturing, and distributing the product. Additionally, the market for smartwatches may actually be smaller than predicted. This would obviously decrease the potential of the watch significantly. Again, there are nuances to this point as well. The market can be tiny, and Apple will experience losses. The market can be medium-sized, and Apple will breakeven. Or the smartwatch market can be slightly smaller than predicted, leading to satisfactory but not ideal sales. Of course, nobody knows for sure. At the moment, the smartwatch market is tiny, but that's because the value proposition for current smartwatches is equally small. Nobody expected the smartphone market to be as large as it is today, and the same can be true for the smartwatch market.
  • It can be extremely successful like the iPhone. This is, of course, the ideal scenario for Apple. It implies that the Apple Watch is a great product and there is a large market for smartwatches. Once again, there is nuance to the point. A great product doesn't imply a perfect product, rather, it's one that meets consumer needs and slightly surpasses them. I will again make reference to the iPhone because it is most relevant to this discussion. The original iPhone was by no means a perfect phone; it had terrible battery life (compared to flip-phones), everything was slow as if covered in molasses, and it didn't even have an App Store. But it allowed consumers so many things that they couldn't have done previously. After a few updates and revisions, the iPhone became a hit and remains one to this day. In short, the iPhone started by meeting and slightly exceeding expectations, through updates it became even better, and now it is Apple's most successful product (perhaps even the most successful product of all time). The iPad did not follow this trajectory. It did not meet expectations when it came out. Nor did the updates bring it in-line with consumer expectations. Hence, it was a good product in a medium-sized market, and sales reflected that reality. I do not know how the Apple Watch will turn out: will it be a bad, good, or great product? I can also assuredly say that no analyst worth his salt knows which of the echelons the watch will become. Apple might think it knows, but even for them it is impossible to know for sure.

I started this piece with a brief history of the iPhone and the iPad, and heavily relied on their trajectories to predict the possible paths the Apple Watch can take. What I explicitly did not do is tell you how many units the watch will sell, what the average selling price would be, and how much revenue the product will contribute. I left this out because I do not know, and my best guess is as good as any analysts out there. Surely you can measure the size of the smartwatch market as it is now, and you can even add the traditional watch market to this pool. Perhaps you also take into account the fitness wearable one. You then multiply this aggregate market pool by a percentage share that Apple will take from it, and now you have Apple's share of smartwatch revenues and volumes. If you are especially ambitious, you added a growth rate to the market, since presumably it will expand in the future. Will that be an accurate figure of Apple's market share?

I would be lying if I said I did not already attempt to do this. My spreadsheets are filled with Apple Watch estimates (guesstimates). It is impossible to run a successful business without them, and I am not saying it is foolish to calculate projections, but this is not a concern you should be worried about. This is a problem for Apple and its consultants. For you, dear consumer, care only about the finished product.