Network Effects in the Market of Apple Watches
Heard of the device that allows you to respond to notifications quickly, track your daily activities, control music with your voice, pay for your groceries, and tell time? That’s right, the Apple Watch! Instead of constantly walking around and looking at your phone, you can look at your watch to stay in touch. When it was first launched, Apple sold 10 million watches in its opening weekend in April, 2015 (this equates to about 3.3 million watches sold a day). However, there has been a sharp decline in the number of watches sold since. From October to December of 2015, Apple had sold 74.5 million watches, about 828,000 watches a day. So is this simply a decrease in sales from the lowering hype about the watch or can we relate it to network effects in the market for Apple Watches? For the most part, it is most likely a mix of both. Nonetheless, we will examine cases where we can see clear signs of network effects taking place in the market.
Sales of Apple Watch. Source: Slice, Inc.
One way to see networks effects playing a role in the decrease of sales is intrinsic value of the Apple Watch to individual consumers. There are two functions at work in an economy with network effects: r(x)f(z), where r(x) is the intrinsic interest of a consumer with an “x” reservation price while f(z) measures the benefit to each consumer from having a “z” fraction of the population use the good. The function means that those who place a greater intrinsic value on a good benefit more from a larger fraction of the population using the good than those who place a smaller intrinsic value on the good. The still large amount of sales shows that there is a “z” fraction of the population that places a greater intrinsic value of the Apple Watch and benefit from its purchase. We see a decline in purchases as the fraction of the population of consumers reaches an equilibrium with the price of the Apple Watch. For more to be sold, the price would need to be lowered which is what we see happening for Black Friday sales.
Finally, is this “z” fraction of consumers that bought the watch above the “z”” high equilibrium value? At this value, there is a downward pressure to purchase the Apple Watch since the benefit is less than the price of the watch, causing consumers to wish they hadn’t bought the good, bringing demand down. In an article by Jay Yarow, he adds a figure from the web that shows interest in the Apple Watch has dropped below that of the iPod. Furthermore, he states that, “People, like myself, have sold their watches. Other folks are finding that life without the watch isn’t so bad. There are passionate advocates for the watch here and there, but it doesn’t seem likely, as presently constructed, to become a massive breakout hit.” As such, one may infer that the drop in interest and sales means that the fraction of consumers, “z” has gone past the high equilibrium value.
Sources:
http://www.marketwatch.com/story/apple-watch-may-not-be-ticking-with-customers-2015-07-07
http://www.businessinsider.com/apple-watch-sales-drop-2015-7
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