Thinking critically about the weird Nano update and hypothesizing an iWatch

I thought the latest update to the Nano didn't make a whole lot of sense, so I tried thinking it through strategically to understand why Apple took such a U-turn with the Nano's design/concept.

When we look at the history of the iPod Nano, one of the most noteworthy eras will be the one in which it created an entire market for smartwatches. Certainly, the relationship was symbiotic: the popularity of the Nano prompted the creation and sale of watch adapters, and the the existence of watch adapters certainly pushed Nano units off the shelves (this was the reason I bought mine, and I know several people who did the same). So why would Apple cancel the iPod Nano in its previous form and cut themselves out of a growing market?

First, let's look at what we know about 1) Apple and 2) the market for smartwatches.

1) Apple hates it when other companies profit from their work. Accessories - such as speakers, docks, and so on - are one thing. If Apple thought they could make an Apple-worthy profit margin on speaker systems, they would have released a first-party option by now. Instead, they chose to license use of their connector technology to companies more capable of or more willing to make an iDevice docking station, and Apple makes money on the licensing fee instead. But companies like Lunatik have built their entire business on the back of the iPod Nano; like a remora, they've attached themselves to Apple and reap more than they sow, which undoubtedly puts them in Apple's crosshairs.

Apple is also known for waiting to move until they're absolutely sure they can get it right. I'm not implying that they don't innovate - that would contradict a mountain of evidence. I'm saying that Apple waits notoriously until an idea, design, or technology is fully market-ready (save Antennagate, and Ping, I guess) before they implement it. Whether they introduce something before or after a competitor doesn't matter - what matters is not subverting the overall integrity of a product in the name of innovation.

For example, take the iPhone 5. Lots of pundits have called the iPhone 5 "boring". The 5's competitors offer various new technologies that the 5 doesn't, like NFC, wireless charging, and this. Plus, the 5 didn't change radically from the 4S in form factor. Sans the screen size increase and overall shrinking of its other dimensions, the 5 is still a thin rectangular slate with one solitaryphysical button. Would it have been worth including new technolgies if it had cost the iPhone 5 something? Which was more important: a bigger Retina screen that requires a bigger battery, or a NFC chip? Juxtapose the trends in screen size and NFC. Smartphone screens average better than 4 inches, while the market for NFC-centric shopping is pretty tiny. So, I'd say the screen/battery win. Apple won't move on NFC until they're going to blow it out of the water (via Passbook would be my best guess). Such patience with design and technology is an enviable quality in a market so saturated with focus on specs or the latest smartphone-of-the-month.

2) The market for smartwatches is very, very real. The evidence? Look at the success of Kickstarter projects Lunatik (just under $950,000 funded, ~63x its funding goal) and Pebble (just under $10.3m funded, ~102x its funding goal).

Let's think about these numbers. Both project teams predicted a reachable but ideal amount of money they'd need to lift their idea off the ground based on their costs, pricing, and market demand. Yet both Lunatik and Pebble saw their projections dashed in multiples of 63 and 102, respectively. When have you heard of a company meeting a financial projection and then crushing it 63 or 102 times over? These two groups awakened a dormant market, and were rewarded amply for their savvy.

Based on 1) and 2), it's not unreasonable to say the smartwatch market was born in part by Lunatik's creativity and in part by the design of the iPod Nano. Pebble's success highlights the potential popularity of smartwatches with consumers, and indicates an opportunity. With these facts in mind, I'd posit that an iWatch is not far off. Since Apple has unintentionally aided in the creation of a market that they play the biggest role in (remember - the Pebble watch has yet to be shipped), why not target it? There's a clear opportunity for Apple to move on the market with a proprietary smartwatch product.

So, let's say Apple wants to make the iWatch happen. What's their play? The competition is off to an incredible start - strong, well-desinged products with huge demand. Plus, they're hitting the market first and fast in a category that is easy for the consumer to conceptualize. How does Apple cut their momentum?

By cutting the Nano.

The new Nano is a loss leader of sorts. Though it will, its purpose isn't to make money. It's designed to break the competition's back.

Lunatik and few others rule the Nano watch-adapter market. Some of their products retail for $130. Again, the numbers: $130, for a metal case and a leather strap that turns your $150 Nano into a watch. $300 spent for a smartwatch, about half of which is on materials (leather, metal, and screws) that could not possibly cost that amount of money. That sure sounds like an Apple-worthy profit margin to me.

So Apple kills the Nano in its current incarnation, because once the 6th gen Nano disappears from the shelves, Lunatik's (and anyone else's) money stream goes with it.

Pebble is a different, but probably more conventional, competitor. The iWatch will likely resemble the Pebble watch moreso than it will the 6th gen Nano, and as such, it's important for the 6th gen Nano to disappear from public memory before the iWatch is ready to be unveiled. And once it is, it will come with a set of features that position it as the high-end market smartwatch we'd expect from Apple: 8/16/32GB memory, full-color Retina capacitive display, support for iWatch-optimized apps, Bluetooth/AirPlay/wireless pairing to connect with other iDevices like the iPhone, and so on. So for now, Apple ditches the Nano to position a future iWatch better against Pebble by guaranteeing the iWatch is percieved to be in the same category as the Pebble, and not the Nano or any other iPod.

Furthermore, the abscence of the 6th gen iPod Nano leaves a hole in Apple's product line that begs to be filled by a similarly small, wearable iDevice - the perfect place for smartwatch.

Only time will tell if there's really an iWatch on the horizon, but there's plenty of substantive evidence to say there is, and it would certainly explain the confusing Nano refresh. One thing is clear: the smartwatch market is blowing up, and will continue to grow. If Apple wants to get in on it, they've taken the first step in that direction.