Venture Bytes #2 – Wearables

Posted January 28, 2015

Wrist Smart? Wallet Smart?

Apple iWatch is expected to launch in April. Will it be a game changer, as is widely expected, or yet another accessory? Will it finally catch the imagination of the masses and usher in the era of Wearables 2.0 or stay limited to a niche market as most devices to date have done? These are pivotal questions ahead of the launch.

Wearable devices have not appealed to the masses as yet. Either the devices have been too pricey, the form factors too awkward, or the functions too limited. A real knock on many devices has been that they are delicate, expensive and largely duplicative of utilities offered by tablets, phones. Google Glass is a perfect test case of a device that had great promise but failed to strike the perfect balance of price, form and function. Fitness wristbands, as popular as they have been so far, just have not done enough to excite consumers given their limited functions. Fitbits, UP bracelets and several other devices have done well as their lower prices and new health utilities have attracted people. To our view, this is the secret sauce. Offer minimalist design, affordable prices and do something the phone does not already do.

Sizing the wearable device market is difficult given the various definitions of wearables. According to Statista, an online statistics portal, the wearable device market – includes products such as Apple iWatch, and medical devices – is expected to reach $7.1 billion in 2015 and climb to $12.6 billion by 2018. Demand for specialized devices like jewelry, clip-on devices and embedded sensors for shirts and shoes is also growing. According to Gartner, shipment of smart clothing is expected to jump from 100,000 units to more than 10 million in 2015. A growing collection of startups making specialized devices, outfitting sensors on everything from shirts and skis to assembly plant gloves and 3D-printed prosthetics, at considerably lower price points than smart watches.

The global watch business is deeply bifurcated and it will be interesting to see if smart watches follow this pattern. China and Hong Kong officially produce and export over 965 million of the 1.2 billion watches produced and exported in a year. Over 80% of watches sell for less than $9. The vast majority of these timepieces are very inexpensive. In 2013, the average price of a Chinese export watch was $3US. In 2013 the average watch exported from Hong Kong was $21US. The average Swiss watch was exported at an average value of $791US. The majority of total revenues accrue to a small minority of, largely Swiss, manufacturers with recognized global luxury brands.

Against this backdrop, Apple Watch is expected to make a grand entrance in mid-April. The watch will have a full color screen, heart-rate-reading technology, fitness- and health-tracking software and a host of apps, from productivity to communication. It will cost upwards of $350, with the most expensive precious metal version to retail at up to $18,000. Apple iWatch is essentially an all-in-one device, ‘with the added allure of being an Apple product. It addresses the three key factors that have been limiting the penetration of wearable devices: price, form factor and function. More importantly, the market is ready for a smartwatch. In a survey conducted last September by Forrester Research, 25% of US internet users used a wearable device in 2014 compared with 14% in 2013, and Juniper Research figures put global shipments of smart watches at 1 million in 2014 and 36 million in 2018.

So, will iWatch move the wearable needle? Most market indicators point to a resounding yes. It is far less clear if the Apple Watch will move the Apple needle. In 2013 the total global luxury market generated $24 billion. Thus, a year of the global watch industry is likely to produce half as much revenue as Q4 2014 did for Apple. Just as the iPhone transformed the mobile phone industry, Apple’s iWatch has the potential to become a pioneer wearable “must-have” accessory. In 2015 we don’t see the Apple Watch transforming Apple but, it may well usher in a new category of niche luxury wearable.

Also featured in this edition is our news section containing articles from The New York Times, Wall Street Journal, and Reuters.