How big might the market be for an Apple smart watch?

Bloomberg’s contribution that first week was a report, sourced by two people “familiar with the company’s plans,” that Apple had 100 product designers working on a wristwatch-like device that could perform some of the tasks now handled by the iPhone and iPad.

Monday’s piece offers an analysis of the smart watch business that makes it look considerably more attractive than the prevailing view on the Internet — which is that nobody wears a watch anymore except as a fashion statement.

Among the points the Bloomberg story makes:

• Watches are a big business. The global watch industry will generate $60 billion in sales in 2013. 
• Watches are a profitable business. Gross margins on watches are about 60%, right in Apple’s comfort zone.
• Watches are a more attractive business than TVs. The margin on watches is about four times bigger than for televisions.
• Apple is interested in watches. The company has taken out 79 patents with the word “wrist” in them, including one for a device with a flexible screen that’s powered by kinetic energy.
• Jony Ive is particularly interested. Apple’s chief designer owns many high-end models and in the mid-2000s had a team visit Nike and bring home boxes of one of their sports watches.
• The timing is right. A 2003 Microsoft-Fossil smart phone partnership fizzled, but customers are more accustomed today to using mobile apps in their everyday lives.

Among the features under consideration, according to one of Bloomberg’s sources, is making phone calls, seeing the identity of incoming callers, checking map coordinates, counting steps (with a built-in pedometer) and monitoring health-related data, such as heart rates.

Assuming a 10% market share of a $60 billion market with a 60% gross margin, Bloomberg estimates that Apple could see revenues of up to $3.6 billion with a successful smart watch. Morgan Stanley’s Katy Huberty did a similar exercise and came up with incremental revenue to Apple of $10 to $15 billion a year, assuming 20% of Apple’s existing customers bought one every two years. See her spreadsheet below.

Bloomberg’s story: Apple’s Planned ‘iWatch’ Could Be More Profitable Than TV