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 1 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). 2 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 3 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). 4 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.