3 Essential Elements for Apple's iWatch Success

NEW YORK ( TheStreet) -- With the Samsung and Qualcomm ( QCOM) watches officially unveiled, the elephant in the room is now Apple ( AAPL).

Samsung's attempt at a watch is destined to fail because it lacks a "must have" application that differentiates it from a smartphone. It won't be easy to find a target market willing to pay $299 for mirrored functionality between the two devices. Apple will experience a similar fate if it chooses a similar approach to the iWatch.

Yes, Internet scrolling, email, iMessaging, social networking apps, health monitoring, camera's and weather are nice to have access to, but all such functionality has been tried and tested on the wrist without significant success.

We are so convinced that such mirrored functionality is doomed to failure that if Apple were to come out with an iWatch that performs anything like the Samsung watch or even the Nike ( NKE) fuelband we would transition our bullish thesis on the company into a bearish one ahead of the expected iWatch launch in 2014. The forfeited opportunity cost would flood AAPL action with negative uncertainty.

To our knowledge, there has never been a watch that sold more than a few million units in a quarter. Apple needs to grow this new product category into 20 million units per quarter if it hopes to move the needle. If Tim Cook and company are serious about creating a viable new product category, then the following three elements are essential:
  1. iWatch should do something that iPhone doesn't do.
  2. iWatch should do something that that is enhanced by the wrist security.
  3. iWatch should have so much high tech built into it that the product costs $400 or more and is sold with a subsidy.

Without these three elements, the iWatch is at risk of becoming a negative catalyst for the stock.

What are all the previously released watches missing? It's the wallet. The wallet has not experienced any degree of innovation since it evolved from a portable satchel used for carrying food and provisions into a flat case for carrying paper currency in 1834. I guess you could argue that the addition of slots used for carrying fuel credit cards in the 1940s qualifies as innovation but you'll have to plead your case.

Clearly the current wallet is archaic and ripe for change. Take a look at the amount of money lost because of credit card fraud and identity theft and you'll conclude that we can do better.

Apple is a disrupter. Its "Authentec" fingerprint technology represents a competitive advantage in the mobile payment space. Give the iWallet to the iWatch and see what happens. If an iWatch can store my credit cards, loyalty cards and drivers license it would be an innovation for consumers to consider.

Add to it that iWatch can replace car keys, house keys and office keys with an NFC chip and you have a "must have." The ultimate bonus is that all of this secure data are right where it belongs -- fastened to the wrist, only accessible with a fingerprint scan.

There is no denying the fact that the iPhone's advantage over Apple's other product lines is a result of subsidized distribution. Initial price points can make or break a product, no matter how good it is. Would American Express ( AXP) be willing to provide an iWatch to its customers at a subsidized price in order to eliminate many of the costs involved with fraud protection? It makes economic sense.

In a world obsessed with status, how appealing would an iWatch with the American Express Platinum logo become? Apple was willing to partner with Nike for the Nike+ line, so why not partner with select financial institutions to offer a $400 iWatch for $150? Not many consumers would spend $400 on a watch, but $150 for a wallet/key replacement? Sign me up today.

This new-age product represents such progress that anyone without it would be viewed as reckless in the fight against fraud. Apple's team of innovators should be viewing the iWatch as an anti-fraud tool as the top priority. If Tim Cook can sell this anti-fruad functionality to the financial institutions, Apple will have a game changer on its hands. If not, the success of the product is at risk.

This perspective on the future of iWatch alters our wish list for the Sept, 10 event. Perhaps the opportune time to release iWallet is in 2014 with iWatch. Reading between the lines of Cook's keynote will be very interesting. As for Apple's current stock action, we identified a potential window of opportunity to average into Apple this week for the EconomicTiming.com portfolio but the run is lacking momentum.

Sometimes you pick a window for all the right reasons but there's no gas in the tank. Wednesday's news flow was as good as it gets (Apple TV, China, and even multiple analyst upgrades) and the corresponding +$10 action was right on schedule, but the stock is responding with no follow-through today. Without this necessary follow-through, current action qualifies as nothing more than a continued breather following the $97 August run. We remain patient as we await the start of the second leg of this run.

Today we're selling a 30% allocation of AAPL October 2013 $480 calls. The easy money pre-event run might be over. Investors are telling Apple that it's time for a China Mobile ( CML). No more messing around. It's time for Apple to show the market that it has a legitimate Apple TV. Considering the negative sentiment of the last year it makes sense that the market is in a 'show me' mood prior to the event. Portfolio is now at 65% cash.

At the time of publication the author was long AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Jason Schwarz is an option strategist for Lone Peak Asset Management in Westlake Village, Calif. He is also the founder of the popular investment newsletter available at www.economictiming.com. Over the past few years, Schwarz has gained acclaim for his market calls on the price of oil, Bank of America, Apple, E*Trade, and his precision investing in S&P 500 option LEAPS. His book, The Alpha Hunter, is set to be released by McGraw Hill in December 2009.

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