Posted on 12/17/2016 12:52:19 AM PST by Swordmaker
Apple is consolidating power within the smartwatch industry at an alarming rate. A growing number of competitors are exiting the space as the anticipation and promise found with wrist computing has materialized for only a select few. For the rest,smartwatches have been nothing but frustration and despair. The writing is on the wall. There isn't a smartwatch industry. Instead, there's only an Apple Watch industry.
The Beginning
Even though it feels like the smartwatch is a relatively new phenomenon, the idea of redefining utility on the wrist is more than five years old. Apple began to investigate a device for the wrist in 2011, just four years after launching the iPhone. The idea was simple: Create a device that pairs with a smartphone. This device would allow the user to spend more time enjoying his or her surroundingswhile staying informed of need to know data throughout the day.
As the project progressed within Apple, there were ongoing questions as to which parts of the smartphone experience would best qualify to be brought to the wrist. In some ways, this experiment is still ongoing five years later. Some of the earliest smartwatches tried to recreate the entire smartphone experience on the wrist, all the way down to recreating a screen of third-party apps. Others bet that smartwatches with more in the way of dedicated (i.e. limited) functionality would do better. In both cases, smartwatches were looked as a much needed growth opportunity that would partially offset the inevitable slowdown in smartphone sales.
Industry Sales
When compared to smartphone and tablet sales, smartwatch sales are still having a difficult time showing up on a chart. Since the start of 2015, there have been approximately 35M smartwatches shipped, compared to 385M tablets and 2.9B smartphones. In 2015, for every smartwatch shipped, there were 12 tablets and 80 smartphones sold. In 2016, these ratios are expected to improve slightly. For every smartwatch shipped, 10 tablets and 78 smartphones will have been sold. People are buying smartwatches. The problem for the industry is that not many non-Apple Watch smartwatches are being sold.
Exhibit 1: Smartwatch, Tablet, and Smartphone Unit Sales (2016E)
The Players
There have been only three legitimate players in the smartwatch industry.
1. Apple
2. Garmin
3. Samsung
Combined, these three companies have represented 78 percent of smartwatch shipments over the past two years. Even more remarkable, no other company has come close to these three in terms of unit sales. Since the beginning of 2015, only seven companies have shipped more than 200,000 smartwatches in any given quarter. Out of those seven, one will soon be broken up in a fire sale (Pebble), another just announced it was getting out of smartwatches (Motorola), and two have shown little interest in releasing new smartwatches (Huawei and LG). This leaves Apple, Garmin, and Samsung.
Even more astounding, the "Other" category, the usual industry catch basin for dozens of other companies, is on track to account for just 11 percent of smartwatch shipments in 2016. One group of companies found in the "Other" category are the original sellers of utility on the wrist - watchmakers. The Swiss watch industry continues to dabble with connected watches. However, one would be correct in questioning the motivation guiding some of these companies. TAG Heuer, apparently in an attempt to claim its position as one of the more successful Swiss watchmakers when it comes to smartwatches, announced it will sell just 75,000 connected watches in 2016. Those kinds of sales make the Swiss watch industry completely irrelevant in terms of the broader smartwatch market.
Consolidating Power
As seen in Exhibit 2, Apple Watch has represented between 45 percent and 65 percent of quarterly smartwatch shipments since launching in 2Q15. Given Tim Cook's recent comments about Apple expecting record Apple Watch sales during 4Q16, Apple Watch is poised to capture an even greater share of industry sales. When considering that the iPod had around 70 percent marketshare in the MP3 market at its height, the Apple Watch is approaching iPod-like sales share within the smartwatch industry. It's clear: Apple Watch has consolidated power after just a few quarters of sales.
Exhibit 2: Smartwatch Unit Sales Share
The primary question facing the smartwatch industry isn't why most companies have been unable to find sales success. The answer is simple: Most smartwatches haven't been appealing to consumers. Instead, the more intriguing question is found with Apple Watch's success. How has Apple been able to sell close to 20M Apple Watches to date? I suspect there are four reasons:
1) Design. The Apple Watch is popular because people want to wear one on their wrist. Jony Ive and Marc Newson are on to something with Apple Watch design. In what isn't a coincidence, the best-selling smartwatch is a device that looks the least like a traditional watch.
Even though the themes of fashion and luxury are no longer discussed as frequently with smartwatches, they remain critical ingredients for Apple Watch's sales success. Apple has positioned interchangeable watch bands as key fashion items for the Watch. In addition, Apple is redefining luxury with Hermès and Edition Watch pricing.
2) Fun. The Apple Watch doesn't have one "killer" app. Instead, the device is a health and fitness tracker for some and a notification and messaging device for others. In both cases, consumers view the Watch as a fun iPhone accessory. The changes found in watchOS 3, including the greater focus on Watch faces, emphasizes the "fun" theme found with the Watch.
3) iPhone. With more than 700M iPhone users out in the wild, the Apple Watch has benefited from being positioned as an iPhone accessory. This type of halo around the iPhone is not found with competing devices. Garmin's success has been limited to certain fitness circles. Meanwhile, Samsung has seen some smartwatch sales success by bundling watches with smartphone purchases. Outside of bundling, there is no evidence to suggest the same kind of halo around Galaxy smartphones exists.
4) Price. In just 17 months, Apple cut Apple Watch's starting price from $349 to $269, a 23 percent reduction. When considering that the cost of a Watch Sport Band has remained steady, the starting price for an Apple Watch case has seen a 27 percent price reduction. In addition, retailers have run with steep discounts for Apple Watch during the holidays. This led to Apple Watch Series 1 going for $199 on Black Friday last month. In what shouldn't come as a surprise, Apple Watch sales have increased as prices have fallen. In addition, these price reductions have left little room for competing devices to breathe. In many cases, Apple Watch pricing is less than that of other smartwatches.
New Developments
We are getting our first good look at the current state of the smartwatch market. There isn't much to see outside of Apple Watch land. This dynamic will likely lead to a few new developments in the wrist wearables space in the coming quarters.
1. The sales gap between smartwatches and fitness & health trackers will shrink.
2. Competition begins to emulate Apple Watch much more closely.
This past November, Fitbit released an alarming earnings report. The company hit a brick wall in terms of sales growth. Fitbit's issues provide a big clue that the market for dedicated health and fitness trackers will have trouble reaching mass market. The fact that Fitbit has already hit a wall in terms of sales growth, despite only selling 55M cumulative devices, suggests the wrist wearables future is much brighter for multi-purpose devices with a screen. This will pressure Fitbit to continue expanding its line and truly enter the smartwatch space.
The company has been busy acquiring assets, including pools of talent such as Pebble's software engineer team, in an effort to fill obvious resource holes. However, it will be tough for Fitbit. To make matters worse, Apple's reconfigured marketing pitch for Apple Watch Series 2 is targeted squarely at Fitbit. Apple management saw how Fitbit was outselling Apple Watch, although at a much lower ASP, and wanted in on the action.
As seen in Exhibit 3, the Apple Watch versus Fitbit battle may be nearing a new chapter. In 4Q15, Fitbit outsold Apple Watch by 3.5M units. Over the subsequent three quarters, Fitbit grew its lead. It appeared Fitbit was gaining momentum (discussed in greater detail in the article, "Apple Is Going After Fitbit."). However, taking Cook's recent comments about Apple Watch sales, and Fitbit's guidance, it appears that Apple Watch will cut into Fitbit's sales lead by 25 percent this holiday quarter. Fitbit is on track to outsell Apple Watch by only 2.6M units in 4Q16.
Exhibit 3: Fitbit and Apple Watch Unit Sales
Meanwhile, on the smartwatch side of the equation, the more successful Apple Watch becomes, the higher the probability that competitors will begin to emulate Apple Watch. We should expect to see competing devices that look much more like Apple Watch in looks and functionality. The design language will increasingly move away from traditional timepieces and instead towards Apple Watch. The design language found with Apple Watch will eventually extend even to luxury watchmakers.
Road Ahead
The smartwatch industry was born at an awkward time. A product designed to handle tasks given to smartphones launched when the average consumer was still only discovering the value found with smartphones. This has removed much of the oxygen from the smartwatch industry, and it appears that Apple is the only one with an oxygen mask. While Apple Watch sales confirm that wrist wearables are indeed a thing, there is still much unknown as to how far away from Apple this sales success will extend. It increasingly looks like Apple's game to lose. Apple is onto something with wearables, and the rest of Silicon Valley (and Wall Street) haven't yet come to terms with that reality.
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“Even though it feels like the smartwatch is a relatively new phenomenon, the idea of redefining utility on the wrist is more than five years old.”
How about Dick Tracy and his two-way wrist radio?
That’s the nicest steampunk diesel amphibious elephant I believe I’ve ever seen.
Well, if someone would make something decent at a reasonable price, they would sell it. Sine there are only obscenely expensive crude little toys that belong in the 1970’s, people are at least buying something semi stylish.
$269 isn’t obscene even for a traditional watch. Apple managed to define the space as far as user interface and multifunction apps, rather than just fitness and health, as well as making their wrist wearable fashionable. They’re very good at that, defining whatever space they enter to the point that competitors are reduced to selling copies at a discount. The “watch” will be no different.
Or, my own invention, the 2-way wrist kindle...
I just bought a Samsung gear s3 and paired it with my Samsung galaxy S4. It’s a seamless phone accessory. Love it!
I have a Samsung Gear S2 and it rubs my wrist bones really badly. I have skinny, bony wrists and it’s a terrible fit, and I haven’t been able to find a softer replacement strap.
I had a Moto Rose Gold smartwatch for $400. It went blank one month in and I sent it back. Motorola told me they could not fix and told me to order a new one. I tried to but they only had the silver watch. Gold color band is $25 extra and rose gold is $50 extra. I went round and round with the moto rep, even offering to get the silver if they refund the $50 extra, but no go. So I called Visa and got a full refund. I now have a Citizen Ladies Eco Drive WorldTime. The only ladies watch ever to have both a battery that never needs replacement and radio controlled settings. It always has the correct day, date, and time and I never have to set it for daylight savings.
I’ve got a men’s Eco Drive, nice watch. Only complaint I have is that the crystal scratches very easily, not a good thing, on a watch that’s not exactly entry level in price.
“Or, my own invention, the 2-way wrist kindle...”
Wow, that must be bulky.
“I went round and round with the moto rep, even offering to get the silver if they refund the $50 extra, but no go.”
When a company is willing to lose a customer rather than do the right thing, it’s time to put them in the rear-view mirror.
That’s cool-looking electric guitar! Do any of the knobs go to XI on that thing? I hope so!
It’s a steam guitar.
I thought I didn't need a watch, haven't worn one for almost 20 years, and put off getting the Apple watch. Me and my wife bought a pair on Black Friday sales, getting $140 off, couldn't resist that. We're now enjoying the utility of these devices. One example in particular.
Always had a problem contacting my wife. I would call her repeatedly, but since her iPhone was buried in her purse she didn't hear it due to outside noise or whatever. Frustrating. Now, we'll text each other and we feel the tap on our wrist from the Watch. I roll my wrist towards me, read the message, and dictate a reply to Siri which is then sent. Easy, without having to pull out the iPhone, or type anything.
Main reason I got it is for the health utilities. It reminds me to stretch, walk, run and do breathing exercises and gives me reports to the iPhone. Nice.
Very nice either way!
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