Assignment #1 Case Study-Apple Watch (A)- The Launch
ASSIGNMENT NO. 1
APPLE WATCH (A)- THE LAUNCH
Submitted by: Waqas Ahmad Khan ERP: 23204
Submitted to: Maria Silat Course Name: Business Economics Course Code: ECO509
MS. Islamic Banking and Finance Institute of Business Administration
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Assignment #1 Case Study-Apple Watch (A)- The Launch
1- Describe the smartwatch market. a) Who are the buyers? Identify three needs/wants of the consumers that a smartwatch fulfills.
The buyers of a smartwatch are typically consumers who need to purchase a smartwatch for any or all of the following reasons:
i. For their own personal assistance such as managing their calendar, for customized location based searches or for social networking ii. For health and medical purposes such as tracking to improve health care habits, monitoring of their vitals, reminding patients to have their medicines all the while staying in constant contact with health care professionals iii. For wellness and fitness purposes such as tracking of sleep, movement etc. b) Who are the sellers? Identify three sellers and highlight their differentiating features.
Sellers of the smartwatches were mostly the multinational companies that were amongst the market leaders in the mobile phone segment. The three sellers before Apple entered the smartwatch market are:
i. Samsung: It occupied 42% market share and used it first mover advantage to lower costs and hence capture a larger market and build a smartwatch ecosystem. However, the software used by Samsung, Android Wear operating system, was viewed negatively by some reviewers and was considered “bland”. ii. Pebble: It occupied the second largest market share following Samsung. It was widely popular because of its sleek design, longer battery life compared to other smart watches (7 days), easy to use features as well as its ability to connect to both Android or Apple devices via Bluetooth. iii. Motorola: It enabled connectivity with an Android hone and used the Google Android operating system which allowed its wearer to call, text, tweet etc. and was water resistant as well.
2. Choose the right option in the below statements about the smartwatch industry and explain your choice very briefly. a) Apple watch is a consumer/capital good.
Apple Watch is a consumer good (as used by end user). b) Study of the smartwatch industry is a microeconomic/macroeconomic topic.
Study of the smartwatch industry is a microeconomic topic (as it’s a business decision based on demand and supply of the market).
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Assignment #1 Case Study-Apple Watch (A)- The Launch
3. The Smartwatch Group predicted 250% annual growth in sales of the smartwatch industry for several years. The industry sales were low till middle of 2014 (about 700,000 smartwatches shipped worldwide). But the sales were expected to surpass traditional watch sales in 2018 and become a six-billion-dollar market by 2020.
Sketch a diagram for (a) smartwatch market and (b) traditional watch market to reflect the above scenario i.e. reflect the growth from 2014 to 2020. State your assumptions. (3 points)
Note: No need to mention specific number of units/dollars.
Following are the assumptions used for sketch;
It was mentioned in the question that “The industry sales were low till middle of 2014 (about 700,000 smartwatches shipped worldwide)” Therefore, for first year I have multiplied with the 125% growth for yearend positon of 2014 for smart watch market. Next years are increased with the growth rate of 250% with the preceding years value in smartwatch market. Whereas, for the comparison analysis of smartwatch with Tradition watch. It is assumed that traditional watch market is 10 times to smart watch at the year end of 2014 (i.e. 7 million). Next years are increased with the growth rate of 125%(i.e. 50% of smart watch growth) with the preceding years value in traditional watch market.
Based on above assumptions the required sketch is presented below;
Comparison of Smart Watch and Traditional Watch Market 3,500
3,000
2,500
Millions 2,000
1,500
1,000
500
0 2014 2015 2016 2017 2018 2019 2020
Smart Watch Market Traditional Watch Market
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Assignment #1 Case Study-Apple Watch (A)- The Launch
4. Explain, using a demand-supply diagram, the “complementarity between smartwatches and phones”. How are the “attributes and pricing of accessories such as smartwatches a key weapon in the mobile phone competitive battle”?
Smartphones(SP) and smartwatches(SW) are complementary i.e. if the price of smartwatches increases then the demand of smartphone decreases. Which may decline the price and quantity demand of smartphone as presented in chart 1 of demand supply diagram.
Similarly, if the price of smartwatch decreases which impact the demand of smartphone. As a results, quantity and price of smart phone increases as shown in chart 2 of demand supply diagram.
The chart 1 and chart 2 of demand supply above explains how either the price of smartphones or price of smartwatches effect each other as both are complements. An increase in the price of any one will lead to decrease in demand of other and vice versa.
5. Consider Figure 1 on Page 5 of the case study which shows the Apple Watch pricing strategy and answer the following questions.
Figure 1 from the case study “Apple Watch (A) – The Launch” is quoted below:
QAW = -150,000 – 2400 PAW + 1520PGearS + 1200 PPebble – 1200 PiPhone6 + 44 A
QAW is the quantity demanded of the Apple Watch per week. PAW is the price of the Apple Watch (dollars per unit). PGearS is the price of the Samsung Gear S watch (dollars per unit). PPebble is the price of the Pebble Steel (dollars per unit). PiPhone6 is the price of the mid-range iPhone 6 smartphone (dollars per unit). A is the quarterly targeted advertising budget for the Apple Watch (in thousands of dollars per quarter).
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Assignment #1 Case Study-Apple Watch (A)- The Launch
a) What is/are the dependent variable/s in the model?
Dependent Variable of above figure 1 is “QAW” i.e. the quantity demanded of the Apple Watch per week. b) What is/are the independent variable/s in the model?
Independent Variable of above figure 1 are;
PAW (i.e. price of the Apple Watch). PGearS (i.e. price of the Samsung Gear S watch). PPebble (i.e. price of the Pebble Steel). PiPhone6 (i.e. price of the mid-range iPhone 6 smartphone). A (i.e. quarterly targeted advertising budget for the Apple Watch).
c) Explain the “sign” of the coefficients of the following variables i.e. explain why the coefficient of the variable is negative or why it is positive? Use the right terminologies. i) PAW ii) PGearS iii) PPebble iv) PiPhone6 v) A
In simple regression equation i.e. Y=a+bX where “Y” is dependent variable, “X” is independent variable, “a” is constant and “b” is the slope or coefficient of independent variable “x”. It is to highlight here that coefficient(b) is the overall estimated value of correlation measuring the strength and the direction of the relationships between the independent and dependent variables.
The figure 1 Independent Variables along with their coefficient(b) are reproduce below in the tabulated form to explain their relation
Independent Coefficient "b" Variables of independent Remarks on “sign” of the coefficients "x" Variables The coefficient of PAW shows the inverse relation with QAW i.e. quantity PAW -2,400 demanded of the Apple Watch per week will increase with the decline in the price of the Apple Watch (dollars per unit). The coefficient of PGearS shows the positive relation with QAW i.e. quantity PGearS 1,520 demanded of the Apple Watch per week will also increase with the increase in the price of the Samsung Gear S watch (dollars per unit). The coefficient of PPebble indicate the positive relation with QAW i.e. PPebble 1,200 quantity demanded of the Apple Watch per week will also increase with the increase in the price of the Pebble Steel (dollars per unit). The coefficient of PiPhone6 indicate the inverse relation with QAW i.e. PiPhone6 -1,200 quantity demanded of the Apple Watch per week will increase with the decline in the price of the mid-range iPhone 6 smartphone (dollars per unit). 5
Assignment #1 Case Study-Apple Watch (A)- The Launch
Independent Coefficient "b" Variables of independent Remarks on “sign” of the coefficients "x" Variables The coefficient of “A” suggest the direct relation with QAW i.e. quantity demanded of the Apple Watch per week will also increase with the increase A 44 in advertising budget (quarterly targeted) for the Apple Watch (in thousands of dollars per quarter.
Consider the scenario that the Apple team had contemplated with the following variable values, prior to the launch.
PAW = 349, PGearS = $380, PPebble = $220, PiPhone6 = $299, A=$15,500
a) Calculate the QAW, using the above values and the demand function in Figure 1.
Figure 1 from the case study “Apple Watch (A) – The Launch” is quoted below:
QAW = -150,000 – 2400 PAW + 1520PGearS + 1200 PPebble – 1200 PiPhone6 + 44 A
Based on the data above, the results and steps of calculation are presented below
Description Constant PAW PGearS PPebble PiPhone6 A Coefficient "B" -150,000 -2,400 1,520 1,200 -1,200 44 Independent Variable Value "X" $1 $349 $380 $220 $299 $15,500 Coefficient multiply by (150,000) (837,600) 577,600 264,000 (358,800) 682,000 Independent Variable (B*X) Dependent Variable QAW 177,200 "Y"(sum of B*X)
b) Calculate QAW only changing PAW to values given in the table. This means keep PGearS , PPebble , PiPhone6 and A fixed.
The results are presented below;
Change of Independent Variable PAW (i.e. price of the Apple Watch ) other PAW 300 310 320 349 350 360 380 390 400 component are fixed as per the part a) above.
Final Value of Dependent Variable QAW (i.e. the quantity demanded of QAW 294,800 270,800 246,800 177,200 174,800 150,800 102,800 78,800 54,800 the Apple Watch)
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Assignment #1 Case Study-Apple Watch (A)- The Launch c) Using the table above draw a demand curve (use MS Excel line chart option). Take QAW on Y-axis and PAW on X-Axis. Like a typical demand curve, your curve should be downward sloping.
Final Value of Dependent Variable QAW (i.e. the quantity demanded of the Apple Watch) 300,000
250,000 QAW
200,000
150,000 (QAW) 100,000
50,000
Final Value of Dependent Variable Variable Dependent of Value Final - 300 310 320 349 350 360 380 390 Range of PAW d) For each of the situations below, explain the effect on the demand curve i.e. is it a movement along the curve, a rightward shift, or a leftward shift?
Calculate the change in QAW and label the variable as New_QAW. Use the same range for PAW i.e $300-$400 to draw an updated demand schedule. Graph a new demand curve (if there is a shift). Keep all other variables, except the one mentioned, as fixed. For example, in (b) only PGearS changes to $400, rest of the values remain as given above i.e. PAW = 349, PPebble = $220, PiPhone6 = $299, A=$15,500 i) Increase in price of AW from $349 to $400 ii) Increase in price of Gear S from $380 to $400 iii) Decrease in price of Pebble from $220 to $150 iv) Decrease in price of iPhone6 from $299 to $250 v) Increase in Advertising budget from $15,500 to $ 17,000
Based on the above 5 points the existing quantity demanded of the Apple Watch per week (QAW) has been compared with the change mentioned above in dependent variables. The results are presented in below chart’
QAW by changing one independent variable coeffient & other remains same as per orginal values 300,000 236,000 243,200 250,000 207,600 200,000 177,200 150,000 93,200 100,000 54,800 (QAW) 50,000 - Actual Indepent Increase in price Increase in price Decrease in price Decrease in price Increase in Variable Value of AW from $349 of Gear S from of Pebble from of iPhone6 from Advertising
Final Value of Dependent Variable Dependent of Value Final to $400 $380 to $400 $220 to $150 $299 to $250 budget from $15,500 to $ 17,000
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Assignment #1 Case Study-Apple Watch (A)- The Launch
In the second part of above question its state that to compute new quantity demanded of the Apple Watch per week (QAW) by changing the price of the Apple Watch “PAW” factor as mentioned in part (b) above. The new quantity demanded (New_QAW) of the apple were computed with the following 5 methods,
QAW: With Actual coefficient factors mentioned in part (a) as per part (b) above. New_QAW_1: All factors coefficient remains same but price of Gear S coefficient has been increased from $380 to $400 New_QAW_2: All factors coefficient remains same but price of Pebble has been decrease from $220 to $150 New_QAW_3: All factors coefficient remains same but price of iPhone6 has been decreased from $299 to $250 New_QAW_4: All factors coefficient remains same but price in Advertising budget has been increased from $15,500 to $ 17,000
Based on the factor explain above new demand curves has been compared with actual demand curve of QAW as shown in the below chart;
Comparison of QAW and New_QAW 400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
Final Value of Dependent Variable (QAW) Variable Dependent of Value Final -50,000 300 310 320 349 350 360 380 390 400
QAW New_QAW_1 New_QAW_2 New_QAW_3 New_QAW_4
From the above chart it can be observed that the all new demand curve has been shifted upward compared to actual demand curve of QAW (quantity demanded of the Apple Watch per week) except New_QAW_2 curve which shows downward shift in demand curve compare to actual demand curve of QAW. This indicates only decrease in price of Pebble steel would decline the quantity demanded of the Apple Watch per week.
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Assignment #1 Case Study-Apple Watch (A)- The Launch
6. What is the marginal cost of producing one more Apple Watch? In other words, what is the Opportunity Cost to the company of producing one more Apple Watch?
As per the case study where it is stipulated that “Apple Watch cost analysis variable hardware and manufacturing costs per unit were estimated at $83.70 and an analyst estimated these figures could amount to at least as much as the hardware costs with the reasonable variable cost estimate was $178 per unit”.
Accordingly, in general to calculate the marginal benefit of apple watches over phones, It can be assumed that Apple can make 2 watches for every phone, given the amount of materials that are required to produce each device. This would give a liner line of regression with negative beta(slope). This makes the marginal cost (defined as the opportunity cost of one incremental unit) of a watch is half of a phones, and the marginal cost of a phone is 2 watches.
7. How will Apple’s entry in the smartwatch industry impact the following? a) The other suppliers. Sketch a diagram to show the affect. In the market the supplier would have a new buyer in the form of Apple. Therefore, it has increased the sales of Apple’s products. Hence, the demand curve would shift to the upward side as presented in below sketch.
b) Healthcare Industry The case study highlights that use of smartwatch may play a positive impact in improving the health of consumer. Hence, it may decline the demand of healthcare product. Accordingly, demand curve would shift downward for health industry as presented in below sketch;
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Assignment #1 Case Study-Apple Watch (A)- The Launch c) Society in general.
In general, apple products have well reputation in its respective market. Therefore, the apple smartwatch undoubtedly be the most technology smartwatch on the market that may lead to productivity in the society as well. However, consumers will continue to purchase traditional watches as well because they make a statement about who you are.
8. Do you own a smartwatch? If not, find a friend or family member who does. Ask yourself/them following questions.
Since I do not have smart watch nor I ever used it. Therefore, I have requested one of my friend who uses smart watch. His reply on required questions are quoted below; a) Which smartwatch brand do you/they have?
Samsung Galaxy watch active 2. b) What price did you/they buy it for?
PKR. 34,000. c) What was your/their budget constraint when buying the watch?
Bought in installments. c) What was yours/their opportunity cost in buying the watch? Explain in terms of what you/they gave up to buy it.
I gave up a lot of money to buy that watch and it was totally worth it. e) Why did you/they choose the brand you/they did? What were the “substitutes” or “complements” involved in the purchase decision?
I already owned a Samsung mobile phone therefore, I thought that a Samsung watch will be more compatible for my phone. Other options available were apple watch, Huawei watch etc. f) Would you/they want to buy an upgrade when it is released?
Yes, definitely.
g) If yes, what is your/their reservation price for it? If no, why?
The price is very high right now, therefore, I am waiting for the price to drop to get my hands on the new edition. h) The watch can most likely be resold. How much can you/they resell it for? (If you/they don’t know exactly, come up with a reasonable estimate, for example 60% of the original value)
I think I can sell it easily for 80% of the value. i) If you/they don’t sell it, what is the opportunity cost of keeping it?
It still has all the functions that the new watch has.
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