Hedging with the Smartwatch Ecosystem

I've spent a few days reading Europa Star's issue 4, 2021.

Unsold watch mechanisms and a dial.

A recurring theme in that issue is the rather stark decline in sales of accessibly priced Swiss watches. This is a point I've made before and also one that @velocophile compellingly made on Instagram. The whole notion of "accessible" pricing is a bit of a moving target these days, one that seems to involve more and more money over time. Nevertheless, watches priced in a window centered on $1,000 seem to sit around, unsold, in inventory for ever-lengthening spells.

There are a lot of people with far more experience than me trying to figure out what to do about this.

Smartwatch faces from one ecosystem.

A few of those people are experimenting with an option that probably deserves wider adoption: designing and selling digital watchfaces. There is an emerging ecosystem on Apple watches and Wear OS (smart watches from Google) which allows third parties to sell watchfaces. Let's explore this development.

Arguably, the biggest financial challenge to a brand experiencing declining sales volumes comes in the form of fixed costs. Taxes are a great example. The tax you own on your business' real estate, for example, is typically due no matter how much of your product you sell (there are probably exceptions but let's just take this as a given). This is the defining feature of a fixed cost, and it defines the shutdown point for a business. If you can't pay your taxes or your other fixed costs because revenues (net of unit production costs) aren't sufficient, the jig is up. Game over.

A design team is a second example of a fixed cost. The salaries for that team are due regardless of the number of watches sold. I believe this is the first reason why watch brands should consider selling digital watch faces. A design team is already creating watch face designs for meatspace watches (meatspace being the opposite of cyberspace). Selling those designs on smart watches simply opens up a second line of revenue, a benefit that can defray a portion of a brand's fixed costs, thereby enhancing its survivability.

It is certainly true that there may be additional costs involved with converting a watch design into a face for a smart watch. There is also probably a lot of resistance to bearing these costs given how unsuccessful Swiss watch brands have been at developing desirable smart watches. However, I believe these additional costs are modest. Hobbyists are designing these watch faces in their spare time, which leads me to believe that a watch brand can figure it out without too much expense (a number already have, a point to which I will turn).

The most compelling reason to enter the smart watchface ecosystem, though, is that it would convert a "threat" into a hedge.

A hedge is like a balancing scale: one side goes down, the other side (hedge) goes up.

If that hedge is used carefully, it may actually expand the market for meatspace watches. A hedge is an opportunity that will thrive if your "main" activity begins to struggle. For example, if an airline owns a passenger rail, the trains serve as a hedge. If, for some reason, people begin to choose train travel over air travel, the company would see rising train revenues that offset diminishing air ticket sales.

Suppose that consumers are buying smart watches as a subsitutue for Swatch watches. If Swatch had its watchface designs available for purchase in the smartwatch ecosystem, then the revenues from those virtual watchfaces would rise as meatspace watch sales declined. Swatch would have a hedge. One objection is that Swatch would trade pennies for dollars in that, typically, digital items are more modestly priced. This is certainly true, but we should also acknowledge that: 1) the cost of producing a smartwatch face is extremely low compared to a meatspace watch and 2) brands don't earn all of the revenue from retail sales, they often split it with retailers (in other words, they are already earning fractions of the dollar in meatspace).

As I mentioned earlier, I believe smartwatch faces also have the potential to reverse the downward trajectory of the accessible watch market segment. Why? These watchfaces place a brand's designs and name on a consumer's wrist, which is the most valuable advertising space imaginable. The number of wrists is in finite supply. With some clever strategizing, a brand could convert the buyer of a brand's smartwatch face into a buyer of a meatspace watch. If successfuly, this would translate the success of smartwatches into success for accessible traditional watches. There are a number of ways to do this, including a marketing scheme pointing out that "upgrading" from a brand's smartwatch dial to the same brand's meatspace watch offers greater opportunity to enjoy the design "whole." When dial is joined with case, case finishing, and strap (or bracelet), the design impression is clearly greater. A brand could also offer to credit the cost of smwartwatch face purchases against the price of a meatspace watch. Even more important, smartwatch face purchases give marketing teams a "lead" into those who might most appreciate their catalogue. Such leads are extremely valuable. I'm certain marketing specialists can devise similar "offramps" from a smartwatch face to a meatspace sale.

As I teased earlier, certain brands have already taken a position in the market for smartwatch faces.

A smartwatch face by Swiss luxury watch brand Maurice Lacroix.

Swiss brands Maurice Lacroix and Formex offer watchfaces on the Facer ecosystem. The "fashion" brands MVMT and AVI-8 do likewise. There are also prominent names such as NASA and Star Trek who are active in the same ecosystem.

My guess is that watch brands will worry a great deal about the "message" sent by entry into the smartwatch face market. They may worry that it diminishes any exclusivity or luxury "halo" that they would like to cultivate. This certainly may be true for brands with year-long waitlists and centuries of legacy. However, this is certainly a secondary concern for the accessible segment of the watch industry. There, the primary concern is survival. Smartwatch faces present a "third way" when it comes to ecommerce, one which does not divert revenue from authorized dealers but, rather, compliments their sales if carefully implemented. Given the glacial pace at which certain watch brands have adopted ecommerce, it is this kind of opportunity which brands should seriously consider. It remains to be seen if they will.

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