So if there’s any technology company today that’s well-positioned to pull this off and build the trust of health care institutions and consumers, it is Apple. It’s an area that has not been incredibly digitized in the past 20 or 30 years like other sectors have been. And there are some very good reasons for the company’s move into health care. Health care accounts for about 18 percent of U.S. GDP. That is massive. That is one of the last remaining markets that Apple could actually grow. The App Store created about five hundred billion dollars, so half a trillion dollars worth of economic activity. Absolutely huge. And I think that Apple could create a market that is similar in that size for health care. But while investors are applauding Apple’shealth focus, physicians are a bit more hesitant. You know, young people who are monitoring themselves with these devices, driving themselves crazy, watching their heart rate, getting these alerts, thinking there something wrong with them, they come into my office all the time and ninety-nine point ninety-nine percent of the time what I offer them is just reassurance.
We wanted to explore why and how Apple is growing its health care business, as well as the challenges the company faces. Steve Jobs, a rebel, an icon, dead at 56… Tim Cook has talked about in the past, you know, the Apple founder, Steve Jobs, go through cancer and healthcare system and realizing that they could make a contribution. I think Steve Jobs imprint was all over the company, and the culture is very derivative of Steve. But I think Tim has always been very thoughtful about health. And so I kind of think he views this almost in some ways as his legacy. The Apple Watch is seen as one of Apple’s most important introductions in the health sector but that wasn’t its exclusive goal initially. It was supposed to be notifications on your wrist.
It was supposed to be fashion. There was a gold one. And over time, the watch has become much more of the health and fitness device, and they’ve sort of ditched some of these other things because they realized that that was actually the most compelling use case for people. But the Apple Watch isn’t the company’s only health initiative. Our business has always been about enriching people’s lives. And as we’ve gotten into health care more and more through the watch and through other things that we’ve created with ResearchKit and CareKit and putting your medical records on the iPhone, this is a huge deal and it’s something that is very important for people. We are democratizing. When you look at Apple’s spends billions of dollars every year in R&D.
Right now, I wouldn’t say the healthcare department or health care team at Apple is the biggest, but they can place a pretty big bet on it. And you can tell they’re taking it seriously because the CEO of Apple, Jeff Williams, runs the health team. We are going to keep pushing watch forward. Apple has three areas of focus when it comes to health: hardware like the Apple Watch, software like the HealthApp and ResearchKit, and services like Fitness+, Apple’snewest subscription service. Some people might provide the software, some people might provide the hardware, which is a largely generic or medical device maker, but Apple can combine them all and kind of have a better user interface, which I think they see as their main edge. All of these devices and services revolve around the iPhone ecosystem, and while iPhone sales are still the majority of Apple’s revenue, wearables and services are picking up steam. iPhone sales have increased an average of about four percent quarter over quarter and about two percent year over year. Since 2017, services have increased an average of about 4.5 percent quarter over quarter and about 22percent year over year since 2017. And wearable sales have grown the most by far, increasing at an average of almost nine percent quarter over quarter and nearly 35 percent year over year since 2017.
The revenue for wearables is already more than 50 percent more than the iPod was at its peak. The danger to Appleis that next year a Samsung or a Huawai or Oppo comes out with something that really captures the consumer’s imagination and they stop buying iPhones. That’s a danger and really investing in this health lessons that because if these features, you know, really catch on and people need them, then they stick with Apple. Let’s discuss hardware first. The Apple Watch is a standout among the company’s health initiatives. Not only does the most recent watch offer ECG recording and heart rate monitoring, but it also includes blood oxygen monitoring, which is very medically-minded and not a huge selling point for the average consumer.
Apple does not report revenue made from the Apple Watch alone, but wearables, a category that includes Apple Watch, along with products like iPods, contributed about six point five dollars billion in revenue in quarter three of 2020. The estimates of watches that have been sold are, you know, 60 million over the years, 70 million over the years, and if the average selling price is around 300, 400 dollars, that’s a lot of money. That’s substantial. That’s, you know, that could be its own company. The tagline is, The future of health is on your wrist. And so I think they’re being very intentional about saying that this device is not just a wearable,it is really about health. Some of the biggest names in medical equipment include Abbott, Johnson and Johnson, and GE Healthcare.
But Apple is not really competing with these companies right now. It’s way outside of their wheelhouse. It’s basically an entirely new kind of business. There’s a lot of regulation there. Innovation is much slower for obvious reasons because we have to ensure safety at each step of the way. And so I think that Apple is very, very unlikely to be making a pacemaker anytime soon. Apple also provides software solutions like HealthKit, which was announced back in 2014, and research it, which helps health care professionals use data from Apple devices for medical research. Their devices are used widely in hospitals, for example, nurses frequently use iPhones or iPods to track medication administration. I use my iPhone on rounds to look up patient data. When it comes to medical records, right now that market is completely dominated by Epic, one company based out of Wisconsin.
There’s a lack of inter compatibility. It’s very difficult and expensive to switch systems. And so because of that, there really just hasn’t been much competition and innovation. That’s where Apple comes in. Apple has a reputation of innovating a stale market, and the company has already struck deals with some of the biggest health care institutions to get health records on the Health app. Well, I think the hardware ecosystem that they’ve created with the iPhone, with the watch, and I think ultimately with AirPods as well, are the tools that will allow them to kind of collect health data for patients and then build those tools for developers to create unique applications that help treat patients in new ways. And that’s what’s really exciting to us, is the combination of all three.
Most recently, Apple announcedFitness+, a subscription workout service that will join Apple’s lineup of other plus services like Apple TV+ and News+. Fitness+ is taking on competitors in the health and wellness category like Peloton and other at-home fitness programs, and with the pandemic keeping so many people at home, it was an ideal time to strike. But Peloton does have aleg up on Apple. Peloton has created devices that Apple hasn’t created. They’ve got the connected treadmill, they’ve got the bike, and so there are some limitations, I think, in terms of how much Apple can really provide in terms of the level of experience that Peloton has created.
There are some unique challenges in the health care space. For example, Apple has regularly complied with the FCC for all of its wireless products, but devices that deal with your health have to answer to another federal entity. Looming over the horizon is the Food and Drug Administration. And if you do certain things like test glucose for diabetes testing, you will be regulated as a medical device and for good reason. If you get the glucose meter wrong, you can kill people. Apple has many electrical engineers that can explain why this is completely compliant with FCC rules, whereas the medical people, you know, they have to hire, they’re building that team. It’s a totally different ballgame.
The company has flown under the radar of major regulations, thanks in part to its classification as a fitness and wellness device manufacturer, nota medical device manufacturer. In fact, the Apple Watch has an aDe Novo classification under the FDA, meaning it is a medical device for which general controls alone, or general and special controls provide reasonable assurance of safety and effectiveness for the intended use, but for which there is no legally marketed predicate device. Apple really wants to say, “this is your health buddy. It’s basically a medical device. You know, you need this to track your vital signs.” But legally, they got to be like, “this is about wellness. This is about, you know, fitness.
This is about health as opposed to medicine.” So Apple’s relationship with the FDA is growing more complex as it adds more medically focused sensors, but some physicians are not convinced that all their patients need the information coming from these sensors. There are definitely situations where, as a doctor, I appreciate and value the data coming in from an Apple Watch. It’s when the watch is driving the disease rather than the other way around that things get into trouble. If you look at the distribution of ages that own an Apple Watch and the distribution of ages that have atrial fibrillation, they are inverse. So, the people who have AppleWatches are the ones who are least in need of continuous monitoring for atrial fibrillation and vice versa. Privacy is also a concern as health data is incredibly sensitive.
Luckily, Apple has a good track record when it comes to privacy. Because the business model involves selling hardware, they can make the argument more coherently that it’s not actually in their interest to sell your health information to a third party. Because if that were uncovered that they were doing that, then it would be a massive blow to that primary source of income, which is the hardware side. I don’t think anybody going to trust Facebook medical records anytime soon. The future of Apple’shealth initiatives look positive. Having control of that end to end experience lets them do things that other device makers can’t do. And I think that’s why they are so well positioned in digital health, is they can collect that data, they can create seamless experiences for the consumer, and they can also let that data be leveraged by those third-party app developers that ultimately, I think power kind of the next wave of digital health with Apple.
The company has already tackle heart rate, electrocardiography, blood oxygen levels, but there is so much more that can be developed. Blood glucose monitoring is something Apple has discussed, which is also been on the radar of some other companies. This would be a huge breakthrough for people with chronic conditions like diabetes. It would be an immense story kind of overnight. I don’t necessarily believe that its possible because these are such challenging things to do from just a technical and scientific standpoint. This stuff is half. This stuff is really hard, you know, taking sensors that really exist, you know, and miniaturizing them and making10 million of them all work. Whether there’s any actual benefit for non-diabetic people monitoring their sugar continuously is totally unknown.
Unfortunately, that’s not going to stop devices from being introduced to the consumer market to do precisely that. And already there are several in the pipeline. Products like iPods might find usefulness in Apple’s health and wellness line-up, too. I think over the long term, what Apple’s device actually becomes is a medical device that sort of delivers treatment to patients, which is, I think, really the coolest thing that they could do with their ecosystem. And so an example might be somebody that might have depression or chronic pain, they could wear an earpiece – it could even be an AirPod – that delivers a very small stimulation to the brain and it actually helps treat the underlying disease.
Now, Apple is not alone in its pursuit of those health care dollars. Google began organizing its health initiatives under the name Google Health in 2018, and now it boasts over 500 employees. Amazon bought PillPack, a prescription medication delivery service in 2018 among other health initiatives. This is a three and a half-trillion-dollar market just in the U.S. A third of that is wasted spend and it’s that wasted spend that technology companies are going after. And it won’t just be one technology company that disrupts, it will likely be many. But Apple is trying hard to become a global leader in health.
The company recently partnered with its first country to prove that point. Singapore is now willing to reward people for achieving certain healthy behaviors and meeting their goals by giving them money. Apple announced it would partner with the Singaporean government to give resident Apple Watch users up to380 Singapore dollars after two years of better health practices like meditating, exercising, and maybe even taking a Covid-19 vaccine when it becomes available. There is clearly a lot that can be achieved in the health care sector.
It’s a really big area. Yep, we’re just getting started I think. People want to maintain good health, and the people who have the interest, time, and money to get devices or tools to monitor their health are going to continue wanting to do so. The question is just whether those devices actually add anything useful for the person versus just giving them more information to worry about. Apple has entered a new battleground with its health initiatives. Peloton, Abbott medical devices, Epicmedical records software, these are all competitors Apple is just now stepping into the ring with. And it’s still unclear who in 10,20 years will be the winner. The advantage Apple has is obviously that they already have a really great and powerful brand in the minds of consumers, and they’ve got a billion people around the world who are using an iPhone, that platform that they always build on top of. It fits in with Apple’s conception of itself as a company that is trying to do good, you know, leave the world better than they found it. Financially, it could be huge, massive, bigger than the iPhone.