In the smartphone market, wireless carriers are easily the most important distribution channel for smartphone OEMs. That even applies to Apple (NASDAQ: AAPL), despite the fact that it has a huge network of retail stores where consumers can go buy an iPhone directly from the company. Most smartphone buyers still prefer to walk into their carrier's retail stores when it's time to upgrade, as the majority of smartphone OEMs don't have direct distribution.
With Apple Watch getting cellular connectivity in the Series 3 models, it looks like carriers are going to play an increasingly important role in smartwatch distribution.
Carrier distribution matters
Apple sold an estimated 2.9 million Apple Watches in the U.S. during the fourth quarter, according to Counterpoint Research (via FierceWireless). Of those, a whopping 975,000 units -- over a third -- were sold through the four major wireless carriers, with Verizon leading the way. Big Red noted on its last conference call that it activated 550,000 other connected devices that primarily consisted of wearables.
Analyst Jeff Fieldhack believes that about half of Apple Watch's U.S. unit volumes were sold directly through Apple Stores. Within carrier smartwatch sales, Apple accounts for approximately 90% of all sales, Fieldhack estimates, underscoring how strong Apple's grip is on the growing smartwatch market.
While I had some initial doubts, adding cellular connectivity is turning out to be a meaningful demand driver. Apple is by no means the only company to offer a cellular smartwatch, but Android Wear has languished as a smartwatch platform.
A new hope
For U.S. carriers, cellular smartwatches represent a new potential avenue for growth, as the U.S. smartphone market is already pretty saturated. The overall market for subscribers isn't growing like it used to, and at $10 per month for a smartwatch cellular data plan, carriers have an opportunity to bolster phone bills while delivering a negligible amount of data. (No one watches video or browses the web on a cellular smartwatch.)
That means the carriers themselves have a vested interest in helping distribute as many cellular-equipped Apple Watches as they can, which bodes well for Apple's distribution needs. Apple often discusses iPhone channel inventory on its earnings calls, but unfortunately doesn't share any information regarding Apple Watch channel inventory.
The potential risk for both Apple and carriers is that users don't end up using the cellular connectivity as much as they initially thought they would, failing to justify the premium associated (both in up-front price paid to Apple as well as ongoing service fees paid to carriers). But for now, more distribution is a good thing.
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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple and VZ. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.