Wearable devices represent the product category currently carrying the consumer electronics industry’s burden of being the ‘next big thing’. Driven by advances in processing and communications chipsets developed in the pursuit of ever-cheaper smartphones, wearables are exhibiting the potential for diversity in shape, colour and function that has been banished from the smartphone world. But are hardware vendors right to bet on smart wearables as a means of supporting margins in the ever-competitive consumer electronics world?
There is no shortage of forecast data available for the wearables market. Credite Suisse predicted a worldwide market of between $30bn and $50bn by 2020, while Analysys Mason plumps for a more modest $23bn. However, even the higher figure is only 14% of the predicted $350bn smartphone market for 2020, which will be characterised by a progressive reduction in margins.
The Analysys Mason report predicts that the single largest segment will be the smart watch with 60 million units sold in 2020, presumably dominated by Apple, followed by “Transformables” – devices that are integrated into clothing, belts, jewellery and so on. Smart bands will progressively decrease, being subsumed into other device categories.
The smart watch prediction may be a gross underestimation – investment banks such as Morgan Stanley are predicting 30 million units in the first year alone, based on initial research on customer purchase intentions. The recent mixed views on Google Glass, a fascinating technology, but one that bears the stigma of geekiness and is raising significant privacy concerns, is evidently dampening expectations of the potential of smart glasses.
Nick Hunn of Wifore Consulting takes a rather contrarian view on the received wisdom. He believes that the market for health and fitness devices are limited to people while the the market opportunity for what he calls “hearables” – hearing-aid-like devices, has been significantly underestimated. Although Bluetooth headsets never really overcome their image problem, Nick Hunn believes that in-ear products will open up a whole range of audio, health and fitness applications. By way of example, consider the Bragi dash, an in-hear device that can contains an accelerometer, and measure heartbeat, temperature and oxygen saturation, easily meeting the capabilities of any fitness tracker. (Note: Nick Hunn’s report can be downloaded here.)
In reality, no-one can claim to know with any degree of confidence how the market will shape, as most estimates put the current market at around 10% of its size in five years. Nevertheless, the evolution of this market will be shaped by a number of factors.
Business Models
As with most electronic devices where brand is not a critical consideration, the price of devices such as fitness gadgets will plummet, as the cost of the components of such devices is already very low. Consequently few companies will successfully find significant profits in the hardware, and will seek business models involving some form of service subscription, bundling with another product or service (think of health insurance) or look for some other way to monetise the interaction, such as advertising or selling data to third parties.
Fragmentation of the world of fashion
Fashion is infinitely more fragmented than consumer electronics, so it will be difficult to achieve scale on highly-visible wearables. Instead, I believe that standard ‘smart’ modules will start to appear for use in items of clothing such as belts, or with existing accessories such as sunglasses, and a wide range of apparently different watches underpinned by a small number of software and hardware platforms.
Lifespan of devices
Expensive, luxury accessories such as phones and jewellery have very long lifetimes, even exceeding that of their owner. Cheaper ones are worn for much shorter times, allowing their wearers to keep up with the fashion of the day – think of Swatches. The useful life of electronic devices is governed by obsolescence, typically being replaced every 1-3 years. It is likely that this obsolescence will place limits on the attractiveness of smart watches in the luxury segment.
Fashion and technology operate by different rules
Fashion accessories such as watches are bought mainly for emotional reasons rather than their technical merits. Indeed the performance of the cheapest quartz watches far exceeds that of all the luxury mechanical watches. A combination of brand perception, prestige and price as well as aesthetics and materials are the primary purchase drivers for watches, very different to the feature and performance-driven tech industry. Although the first movers have been the consumer electronics firms, in the long term, existing watch makers will likely find their that their brands, manufacturing technology and distribution networks will put them in good stead. Note that they have already successfully faced the quartz watch and digital watch challenges. Indeed Swatch announced that they will be launching a Swatch Touch product next summer.
Apple can successfully challenge the incumbents
Apple is the only technology company who has the brand, design expertise, retail network and global appeal to successfully compete in fashion markets. Unusually for Apply, the watch will come in a multitude of models, characterised by size, style, material and strap, a hitherto unknown level of customisation for an Apple product. Indeed, a Morgan Stanley survey indicates that US market purchase intention for the Apple watch exceeds that for the iPhone and iPad, leaving much of the investment banks feeling bullish about their prospects.
Don’t forget about business and enterprise applications
This post has deliberately focused on the consumer market, though as display, communications, miniaturisation and augmentation reality technologies mature, wearables will find enthusiastic adoption in many fields, particularly as they won’t be held back by the vagaries of fashion. Indeed, wearable displays are one area where business applications will most likely run ahead of consumer adoption. In the workplace, wearables offer the user the opportunity to access information while keeping his hands free, which has clear benefits in healthcare, maintenance, manufacturing, retail and a wide range of safety-critical jobs. Additionally, wearables are quickly becoming an essential and critical part of soldiers’ and emergency personnel’s equipment. We are however only scratching the surface on the range of applications, and this is a topic I will return to before long. (update: See new blog post on enterprise applications here)
In conclusion, I suggest to take with a pinch of salt any confident prediction of how the wearables market will evolve. It is nevertheless safe to say, that wearables will rapidly migrate from the preserve of early adopters and become a ubiquitous part of both our daily attire, as well as of our workplace, and will link seamlessly with our interactions with both the physical and online world.