1TECHNOLOGY-FUELED CREATIVE

APPLE WATCHCREATING VALUE OUT OF THE GATE

® ™

2

Index

5

9

14

23

The wearables playing field

Caveats and considerations

Creating value

Closing thoughts

3

Apple’s WatchKit will be made publicly available

in just a few short weeks, ushering in a new era of

interaction between people, technology and commerce.

As consumers begin to learn this new platform’s

functionality, they will be looking for brands and

technology providers to develop applications that not

only make buying easier, but also make life better, more

productive and more entertaining.

Brands that embrace this opportunity will be seen

as technology leaders. Just as important, first-mover

brands will essentially gain the upper hand, taking

advantage of the opportunity to shape the category

and define the rules of engagement that will define the

business and consumer world for many years to come.

BRANDS THAT

EMBRACE THIS

OPPORTUNITY

WILL BE SEEN

AS TECHNOLOGY

LEADERS.”

“Guidance for bold brands

4

Ready to make an impact? Here’s guidance and insight for brands focused on making smart, bold moves as the wearables market unfolds.

5

THE WEARABLES PLAYING FIELD

6

To date, the performance of wearables is a mixed

bag. The category isn’t well defined either in terms

of what constitutes wearable technology or how it

is perceived by consumers/end-users.

Currently, wearables encompass multiple

platforms, including:

The category disorder has done little to abate

growth. The overall appeal and long-term prospects

for wearables remain very bright.

The current landscape

THE WEARABLES PLAYING FIELD

ACTIVITY TRACKERS

3D MOTION TRACKERS

SMART CLOTHING

WEARABLE CAMERAS

SMART GLASSES

HEALTHCARE DEVICES

7

The wearable computing market is expected to ship 90 million units in 2014, a 67% increase over 2013.

The same market coverage projects a 72% rise in 2015 shipping over 146 million units. Inside this growth is a surge in

the now nascent smartwatch category, more than tripling its output from 7.4 million units in 2014 to over 24 million

in 2015. This projection is in line with other forecasts predicting high double-digit category growth in wearable

technology in the coming years.

Growth mode for wearables

THE WEARABLES PLAYING FIELD

Smartglasses are projected to grow the most

in 2015, but its growth is misleading, as the

category is moving from roughly 2 million

shipped units in 2014 to 10.5 million in 2015.

Conversely, smartwatches are projected to

ship around 7.5 million units in 2014, growing

to roughly 25 million units in 2015.

WEARABLES PROJECTED GROWTH 2014-2015

396%

235%

130%

72%

35%

52%62%

16%

0

1

2

3

4

WEARABLES CAMERAS GLASSES WATCHES HEALTHCARE TRACKERS 3D MOTIONSENSORS

CLOTHING

Source: MobiHealthNews

8

Apple is uniquely positioned to reshape the wearable computing category and reorganize it into a simpler and more discernible system of products and services for brands and consumers.

When considering Apple Watch’s potential impact,

it’s important to recognize that it’s a component of a

larger ecosystem—something almost no other wearable

computing product can boast.

Apple Pay, now in its infancy, will go to market with the

help of the surging iPhone 6, the App Store, an updated

iPad and the Apple brand, which is once again creating

outrageous, almost irrational demand for its products.

And while Apple Pay waits for many large-scale retailers

to publicly jump on board, it offers a broad portfolio of

financial service providers who are confident enough to

align with the transaction service prior to its public debut.

The power of Apple’s ecosystem

THE WEARABLES PLAYING FIELD

9

CAVEATS AND CONSIDERATIONS

10

The Apple Watch is an important evolutionary step for mobile and wearable technology. Over time, it will grow into a mainstream product.

To better understand how Apple Watch may enter the market, it’s helpful to look back at the introduction of another

revolutionary product that drew much speculation before its release: the iPhone.

Not an overnight sensation

CAVEATS AND CONSIDERATIONS

Today’s iPhone sales (35.2 million in Q3 2014) were

preceded by very modest first quarter sales of

270,000 units in Q3 2007. And that was well after

most consumers had been exposed to the iPod

and were craving any creation from Steve Jobs.

Significant sales didn’t happen until a year after

the iPhone’s introduction.

Apple Watch’s hype will likely help lift sales well

beyond the iPhone’s humble beginnings, but there

are several factors that promise to make those

gains incremental as opposed to wholesale in the

near term. All signs point to incremental Apple

Watch growith initially. Many brands will take a

wait and see approach before investing time and

resources. We think this is a mistake.

39.99

72.29

150.26

125.05

11.6320.73

0

50

100

150

200

2007 2008 2009 2010 2011 2012 2013 2014

169.22

1.39

GLOBAL iPHONE SALES, 2007-2014SALES IN MILLION UNITS

Source: Apple© Statista 2014

Fiscal years

11CAVEATS AND CONSIDERATIONS

One of Apple Watch’s restraining forces is actually an asset: price.

It’s important to remember that for each iPhone Apple

sells, its wireless partners pick up nearly three-quarters

of the actual price. There is no similar subsidy for the

Apple Watch.

It’s safe to assume that consumers will initially be asked

to pick up the whole tab like they do with the iPad.

First-wave buyers are desirable targets for marketers

and brands, but can be difficult to segment out of the

larger consumer audience. Apple Watch offers the

potential to work with them directly, absent the rest of

the consumer universe.

Brands will essentially have a straight line of sight to

high-end influencers who will be the driving force

behind Apple Watch evolution and the wearable

category as a whole.

Expensive isn’t a bad thing

Tech-forward and driven by a curiosity and craving for the newest and most novel technology experiences.

More affluent with the discretionary spending power needed to fork out hundreds of dollars for an untested technology.

Younger with a greater digital nativity and a heightened desire for statement or badge products.

FIRST-WAVE BUYERS WILL BE:

12

Tapping into impulse spending

CAVEATS AND CONSIDERATIONS

Recent consumer credit card innovation efforts have

been either incremental enhancements or flat out

misfires. Those who tried, unsuccessfully, to use the

contactless credit card POS stations that now sit

idle in many fast-food restaurants can relate. Google

Wallet is reputed to have lost $300 million because of

the charges it had to absorb from semi-cooperative

creditors.

Despite the somewhat grim history of credit card

transaction format innovation attempts, it’s clear that

the urge has always been there and that card providers

have driven almost all of it—mostly in the name of

increasing credit card transaction frequency.

A 2013 Federal Reserve study of pre- and post-recession

spending patterns reveals a staggering rise in credit

card usage from 2003 to 2012—credit, debit and pre-

paid card transactions rose by over 45 billion a year.

The skyrocketing number of card transactions illustrates

the consumer’s almost insatiable urge for near-

instantaneous transactions. This helps explain the long

list of mostly failed attempts to make spending easier.

By enabling credit spending with a flick of the wrist, it’s very likely that apple watch consumers will actually increase their transaction velocity and spending.

The disparity between debit and credit card spending

confirms what behavioral economists have been

saying for years and proving in experiments: a lack of

transparency obscures consumer mental accounting,

allowing them to more freely give in to their impulses.

13

Much of the spotlight has been cast on Apple Pay, but

just as important is iBeacon. Apple Watch and its likely

impact on the wearables category will move consumers

one step closer to hyperpersonalization, whereby their

data cloud is analyzed in various retail environments to

enable contextualized offers, discounts or services. The

expected net result is an as-yet unseen level of customer

intimacy. As most of this will be permission-based,

consumer confidence will be a key element of success.

Interestingly, cbsnews.com recently ran an article, “Are

impenetrable phones a threat to national security?”

It quotes FBI Director James Comey on Apple’s new

encryption standard, “It’s the equivalent of a closet that

can’t be opened, a safe deposit box that can’t be opened,

a safe that can’t ever be cracked.” While most technology

professionals will tell you no system is unbreakable,

Apple’s response was, “We wouldn’t be able to comply

with a wiretap order even if we wanted to.”

Privacy and data concerns

IT’S THE EQUIVALENT OF A CLOSET THAT CAN’T BE OPENED, A SAFE DEPOSIT BOX THAT CAN’T BE OPENED, A SAFE THAT CAN’T EVER BE CRACKED.”

“

CAVEATS AND CONSIDERATIONS

14

CREATING VALUE

15

Each business category offers a unique set of opportunities and challenges for capitalizing on Apple Watch in the near term. The following guidelines should help

kick-start concept development and expedite solutions.

GUIDELINES FOR SUCCESS

CREATING VALUE

EXTEND EXISTING MOBILE PROPERTIES

GIVE IT A JOB BUILD FOR SEGMENTS

INTEGRATE IT INTO DAILY LIFE

ASK PERMISSION SIMPLIFY CREATE VIPS

16

It’s important to remember that Apple Watch will be an untested and unknown

commodity for consumers and brands alike. As a result, there’s wisdom in first

capitalizing on Apple Watch as a part of a larger system (rather than as a

standalone innovation), then pushing outward.

Finding ways to simplify and extend the reach of a brand’s existing mobile platform will be key in helping consumers become more comfortable with the

device’s capabilities and a brand’s ability to develop for them.

1. EXTEND EXISTING MOBILE PROPERTIES

CREATING VALUE

17

Apple Watch is the first device in years to offer consumers an opportunity for

discovery, fascination and actual learning. As a result, consumers and users

will be asking themselves either explicitly or implicitly, “What job do I need

this to do?” Because it will be app-driven, consumers will instinctively begin to

customize with a set of applications that work best for them.

Content-only plays that don’t differ from what consumers experience on their existing devices will likely disappoint.

2. GIVE IT A JOB

CREATING VALUE

18

The basic rule of thumb when designing a gender-specific product is physical

proximity. Gender-specific cars? Not so much. But gender-specific clothes, hair

care products and hygiene are no-brainers. Rather than developing one-size-

fits-all applications, brands should attempt to drill down into the utility needs of

specific customer segments.

Apple Watch’s always-on presence will offer brands and developers a markedly different opportunity to address a broad range of needs for specific segments—women, kids, moms, dads, etc. Don’t ask what your customers (plural) need. Ask what that customer needs.

3. BUILD FOR SEGMENTS

CREATING VALUE

19

Another key opportunity is for brands and products to subsume related

categories and streamline multiple functionalities into a more seamless

experience that accurately reflects the real world.

The Apple Watch’s ever-present nature will demand simplicity and order from

brands consumers interact with. It’s important to remember that consumers

construct their daily lives around the services they require and clearly

understand how they interact with one another.

Brands would be wise to offer applications that organize the disparate parts of a consumer’s daily life. This presents a unique opportunity for financial services brands, for example, to manage diverse digital assets, including loyalty programs, coupons and discounts.

Conversely, retail brands with a consistent presence in a consumer’s life also

have an opportunity to help organize the day-to-day and integrate related consumer functions into a digital butler-type functionality.

4. INTEGRATE INTO DAILY LIFE

CREATING VALUE

20

While Apple Pay is getting most of the buzz, Apple Watch promises to deliver

unique experiences using beacon technology. Imagine getting off your flight

with gate information instantly ported to your wrist or having your device alert

you to products that go well with products you’ve purchased in the past.

There are already many reasonably priced beacon platforms to facilitate these

realities, ranging from Gimbal to Passkit to Roximity.

But before brands roll these applications out en masse, it will be critically

important to help consumers stick their toe in and begin to trust these newer,

more intimate relationships with brands. It will be important for brands to explicitly ask permission for and get incrementally greater levels of access over time rather than going for the big data grab all at once.

Brands traditionally follow users in technology adoption. In this instance, brands

and consumers will be discovering the technology at the same time, so it will be

important to handle the relationship with care.

5. ASK PERMISSION

CREATING VALUE

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It’s very important to be mindful of the Apple Watch’s limited physical platform.

While iPhones are getting larger, the Apple Watch is going to make consumers

get much smaller.

Brands should work within the size limitations by divining ways to communicate with limited visual cues that are both intuitive and informative. The fields of semantics, syntactics and pragmatics all have very specific value in

this instance. How can the relationships between signs, symbols, structures and

agents come together to communicate effortlessly as the platform they’re being

delivered on?

Mobile devices have created the expectation that existing digital platforms can

be retrofitted to suit the mobile platform. It’s doubtful the same strategy will

bear fruit in the short term for Apple Watch and other, similar platforms.

6. SIMPLIFY

CREATING VALUE

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End-users ultimately hold a platform’s fate in their hands. But organizations and

brands also play a role. Acceptance can and largely will happen through the

adoption of Apple Pay.

Creating value for customers can also come in the form of Apple Watch

enablement in the sales or customer-facing organization. Brands could easily create simple processing systems to facilitate information sharing between a consumer with the Apple Watch platform and a representative on the other half of the transaction.

Customer service screening, order taking and other functions could exist in two

lines, those with Apple Watches and those without.

7. CREATE VIPS

CREATING VALUE

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CLOSING THOUGHTS

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Backing a new technology is never an easy decision.

Committing to it fully is even more difficult, especially when

there’s no real market or proven track record.

While it’s true questions remain to be answered,

opportunities for commitment and exploration exist that

allow more cautious brands to test the waters just like more

cautious consumers likely will.

We believe our guidance offers a broad enough set of

recommendations for different brands to assess which

opportunity fits them best and move forward accordingly.

CLOSING THOUGHTS

Get ready. Jump in.

OPPORTUNITY FOR MARKETERS:

• Get on the ground floor with Apple, essentially riding the wave that iPod, iPhone and (to some degree) iPad experienced.

• Help steer the ship with the customer/consumer.

25

BEN GADDIS

Chief Innovation Officer

512.721.1380

ben.gaddis@t-3.com

JAMES LANYON

Innovation Director

512.721.1763

james.lanyon@t-3.com

Let’s talk.

Copyright © 2014 T3. All rights reserved. Other products, charts, logos and company names mentioned herein may be trademarks or service marks of their respective owners. Images courtesy of Apple, Google, Intel, Moticon, Ralph Loren, Withings and Motorola.