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3 Essential Elements for Apple's iWatch Success

Tickers in this article: AAPL AXP CHL NKE QCOM
NEW YORK (TheStreet) -- With the Samsung and Qualcomm watches officially unveiled, the elephant in the room is now Apple .

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 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.