Summary

Manufacturers such as Seiko and Casio were experimenting with smart watches in 1980s. Although these early devices never attracted mass demand, the recent ability to pair a smart watch via Bluetooth with a smartphone has improved the functions available and made the products more interesting to users.

Currently, typical smart watch functions include allowing users to read email, text messages and other notifications such as calendar or social media updates; view incoming or missed call alerts and play music which is stored on their smartphone. More advanced features include hand gesture control, voice-to-text and voice call pick-up.

However, while the products that have been recently introduced by companies like Sony, Pebble and COOKOO are a step forward the feature set on the table at present is nowhere near aggressive enough to catalyse a mass market for smart watches.

The next wave of smart watches expected to come to market in the short term include the Kreyos Meteor SmartWatch, the Geak Watch and the Sonostar smart watch, but these products are likely to offer more of the same.

Our analysis is that smart watches presently resemble ‘dumbed-down smartphones’ or ‘sexed-up wristwatches’ and neither of these approaches will be successful in stimulating mass demand, especially not when the price is circa USD 200.

It will not be until we have seen what the heavyweight mobile technology vendors deliver when they launch their smart watch products that it will become clear whether this more recent evolution of the smart watch market will turn out to be a fizzer, or a huge global industry.

Our analysis is that the latter will turn out to be the case. We therefore project that worldwide shipments of smart watches in 2014 will be in the region of 8.9 million units with shipments in 2018 reaching 214 million units. However, these figures could be conservative, certainly when one takes a longer-term view of what the 'smart watch' could become.

We foresee the 'smart watch' of the future incorporating a SIM card, a full-function mobile phone, voice-controlled UI, an AI engine that is optimised on an app-by-app basis and a service delivery infrastructure that is accessed in real time over the web. Other features, such as fingerprint-based activation and location awareness would be standard.

If vendors can eventually deliver on this product vision then a substantial chunk of the mobile device market as we presently understand it would be cannibalised by a new generation of wrist-mounted mobile devices, while the mid-segment of the watch market would be largely swept aside.

We foresee smart watches as having the potential to take the mobile device business into a new phase of growth and innovation. In years to come, we will look back at products like iPhone and wonder what all the fuss was about.

History of the Smart Watch Market

The smart watch is by no means a new concept.

Japanese watch manufacturer, Seiko, was one of the early players which debuted the Pulsar NL C01 digital watch, one of the first watches with a user-programmable memory, back in 1982.  Seiko went on to release the D409 watch in 1984 which featured data entry via a miniature keyboard and the RC-20 Wrist Computer in 1985 which incorporated world time, memos and calculator applications.

In 1983 another Japanese watch manufacturer, Casio, brought out the Databank digital calculator watch and went on to develop watches with PDA-like functions including memos and contact details, storage for email addresses and telephone numbers.

Title:Early Smart Watches
Markets:Devices, Smart Watches

In 2001 Japanese watchmaker, Citizen Watch, was collaborating with IBM on the WatchPad 1.5 device which featured a Linux 32-bit ARM processor, a speaker, microphone, hand movement sensor, Bluetooth and various PDA-like functions as reported by PCWorld Business Centre. The product was expected to be targeted at business users at a price of USD 399 but it never came to market.

Microsoft developed Smart Personal Object Technology (SPOT) as a means of personalising household electronics and SPOT-based smart watches were released by watchmakers Suunto and Fossil in 2004, followed by models from Swatch and Tissot. The SPOT smart watches depended on a subscription to MSN Direct network services and data was accessible over FM radio waves. However, largely due to a high launch price tag of around USD 800 and poor battery life, SPOT smartwatches were discontinued in 2008.

Market Status: Existing Products

Technological developments, mainly originating from the mobile phone industry have provided vendors with a range of electronic components that have enabled a new wave of innovation:

Samsung

Announced on Wednesday 04 September 2013 at IFA in Berlin, Samsung’s  Android-based Galaxy Gear smart watch represents a definite step forward for the smart watch market.

While many of the features offered by the device are already offered by rival devices there are three unique features:

  • S-Voice,  Samsung’s newly-announced voice command technology  allows the user to control certain functions by voice, although this does require the user to keep a button on the side of the device depressed during speech) supported functions include voice memos, initiating calls, dictating messages and setting alarms.

    While S-Voice certainly represents step forward, the technology is presently limited to controlling device functions. For example, there is no ability to control cloud functions, such as managing a calendar or searching the web. We expect this next step to be taken by Apple and/or Google;

  • Galaxy Gear includes a motion-based function which allows the user to receive a call by raising their hand to their ear, as if they were holding a phone (this is necessary to place the microphone in close proximity with the users mouth);

  • The device incorporates a 1.9 MP camera integrated into the wrist strap (pictures and videos).
Title:Samsung Galaxy Gear Smart Watch
Companies:Samsung
Products/Services:Galaxy Gear
Markets:Devices, Smart Watches
Years:2013

 

Other non-unique features offered by the device include:  

  • 1.63-inch display with touch control;
     
  • Bluetooth-based synch, initially with Samsung’s Note 3 ‘phablet’ and Note 10.1 tablet and, with a software upgrade, the Galaxy S3, S4 and Note 2;
  • Touch-based interface;
     
  • Gyro and accelerometer;
     
  • Voice memo capability with an associated voice-to-text function which allows memos to be saved on the users companion device in text format;
  • Speaker and noise cancelling microphone;
     
  • Pedometer for those interested in tracking movement and calorie consumption etc.
     
  • The user can make a call by dialling a number on the watch;
     
  • Gallery synch: allows the user to synchronise picture and video collections between the Galaxy Note 3 and the Galaxy Gear;
     
  • Music control: allows the user to control music playback on the Samsung Note 3 ‘phablet’;
     
  • Apps: 70 apps are available at launch, although the device can only support a maximum of 10 apps at one time. Apps are added to Galaxy Gear  using a ‘Gear Manager’ program which resides on the user’s Galaxy smartphone;
     
  • Battery life is, according to Samsung, more than a day of ’regular use’ on  a full charge (25 hours+) . Recharging is via a snap-on cradle.

Samsung has said that the Galaxy Gear will be introduced at a launch price of $299. The device will be available in 149 countries from September 25th.

Qualcomm Toq Smartwatch

As of of the world’s leading mobile technology companies, with a growing interest in mobile semiconductors, Qualcomm is clearly interested in the emerging smart watch market.

The company’s 800MHz Snapdragon system on a chip (SoC) is already used by some smartphones and tablets and now, most recently, by Samsung’s Galaxy Gear smart watch.

On 4th September the company announced the Android-based Toq Smartwatch, a new Qualcomm-branded smart watch which was released by the company’s wholly-owned subsidiary Qualcomm Connected Experiences, Inc

Title:Qualcomm Toq Smartwatch
Companies:Qualcomm
Products/Services:Toq Smartwatch
Markets:Devices, Smartphones
Years:2013

The one truly unique feature offered by the Toq is wireless charging: the user simply places the device on  the associated case, which can also be used to wirelessly recharge the optional wireless earpieces.

The Toq, which is being introduced on a limited-edition basis, is seen by Qualcomm as a way to promote the capabilities of some of Qualcomms’ core mobile technologies, including Snapdragon and Mirasol, which is an ‘always-on’ display technology specifically aimed at mobile devices that offers improved readability and reduced power consumption.

WIMM Labs (Google)

On August 30, GigaOM reported that Google had acquired WIMM Labs, a California-based smart watch company that was founded in 2008.

Up until the summer of 2012, WIMMLabs  had been developing an Android-based smart watch and and developer network. But in the summer of 2012 the company posted the following message on its website:

“During the summer of 2012, WIMM Labs entered into an exclusive, confidential relationship for our technology and ceased sales of the Developer Preview Kit (…) We’d like to thank all of our developers for their interest and willingness to experiment with our platform and look forward to exciting advances in the wearable market.”

It has now been revealed that the reason for this was that WIMM Labs had entered into an agreement with Google which required the company to cease development of its smart watch platform. GigaOM has reported that a Google spokesperson confirmed that WIMM Labs had, in fact, been acquired by Google.

It seems that Google’s mostly likely objective will be to use the technology acquired from WIMM Labs to introduce a new version of Android specifically aimed at smart watches, along with a companion Google-branded smart watch. This would mirror the strategy that Google is already executing with smartphones and tablets.

Sony

Sony launched the Sony SmartWatch in Spring 2012.

Currently retailing in the UK at GBP 79.00 (August 2013), the watch features a touchscreen and weighs a total of 41.5 grams (including strap).

The device allows users to read emails, SMS messages and other notifications such as calendar or social media updates. These features are made possible by a wireless (Bluetooth) connection between the SmartWatch and the user’s Android-based smartphone.

Various apps are available for download from the Google Play store, including a music player app which allows the users to access their music library which resides on their smartphone.

Sony has also announced the SmartWatch 2 model which is due out in September 2013. This device features a larger display, NFC technology and a water-resistant coating (see this review from engadget).

Title:The Sony SmartWatch
Companies:Sony
Products/Services:SmartWatch
Markets:Devices, Smart Watches

COOKOO

The COOKOO smart watch has benefited from crowdsourced funding via the Kickstarter site.

Launched by the Hong Kong-based ConnecteDevice Limited in January 2013 at the Consumer Electronics Show, the COOKOO watch offers the following alerts from the user’s iOS-based smartphone:

  • Incoming calls
  • Missed calls
  • Facebook messages and posts
  • Twitter mentions
  • Calendar reminders
  • Google Voice SMS
  • Email notifications
  • Low battery alerts for the iPhone or iPad
  • Alarm alerts
  • Timer alerts.

The COOKOO water-resistant watch also allows the user to take a photo, tag their location on a map and find their phone if it is mislaid. This watch is compatible via Bluetooth 4.0 with these devices: iPhone 5, iPhone 4S, iPad mini, iPad (4th & 3rd generation), iPod touch (5th generation) on either iOS 6 or iOS 5. More compatible devices are to be announced in the near future.

Title:The COOKOO Smart Watch
Companies:Cookoo
Products/Services:SmartWatch
Markets:Devices, Smart Watches

I'm Watch

First launched at CES 2012, and dubiously promoted as the world’s first smart watch by Italian developer, i’m SpA, the I’m Watch smart watch was upgraded and promoted at CES 2013 with a retail price of USD 399 (dropped by August 2013 to an online store offer in the UK of GBP 219).

Featuring a 1.5-inch touchscreen, this smart watch runs a customised Android OS called i’m Droid 2 and is compatible with the iPhone 4S, iPhone 5, any Android 4.0 or BlackBerry 10 smartphone.

Unlike most other smart watches which operate using smartphone apps, the i’m Watch is based around its dedicated website, the i’m Cloud. The i’m Cloud site is the starting point for setting up the device and downloading apps via a Bluetooth connection.

The device weighs 90 grams and offers Twitter and Facebook updates, music play, a headphone connection and hands-free calls. However, the i’m watch does not offer text message alerts, which most other smart watches do, requires a daily recharge and offers only limited apps according to this TechRadar review.

Title:The i'm Watch
Companies:i'm
Products/Services:i'm Watch
Markets:Devices, Smart Watches

Other Vendors

There are also a number of sports-focussed smart watch devices on the market such as the TomTom Runner and Nike+ SportWatch GPS. These offer features such as GPS, large displays, performance information, one button control and heart rate monitors.

Title:The Nike+ Sportwatch GPS and Tom Tom Runner Smart Watches
Companies:Nike, Tom Tom
Products/Services:Sportwatch GPS, Tom Tom Runner Smart Watch
Markets:Devices, Smart Watches

Next Phase: Upcoming Products

A number of smart watches are available for pre-order as of August 2013. The Kreyos Meteor SmartWatch is expected to ship in November 2013 at a cost of USD 140 (full specification here), and the Geak Watch, which offers health and fitness monitors as well as Android compatibility, support for Wi-Fi, Bluetooth, GPS, NFC, an FM radio, movie playback and voice-to-text, is available for pre-order at USD 330.

The Sonostar smart watch is priced at USD 179 and is currently available for registration of interest. This device features a 1.73-inch e-paper screen, 5-7 day battery life and is compatible with iOS or Android smartphones. Bluetooth connectivity and app-based functionality enable the delivery of call alerts, texts, social updates and music control to the watch.

Many of the major tech companies have a smart watch in development, although details are restricted.

Samsung

Having already launched the Samsung Galaxy Gear, Samsung will already be working on the next iteration of he product - mindful that key rivals such as Apple and Google will be motivated to introduce their own products which are likely to be more advanced than the Samsung Galaxy Gear.

Samsung is understood to be developing flexible screen technology. According to Moveplayer.net (Chinese), Samsung has filed 3 smart watch design patents, including one for a wraparound screen design:

Title:Samsung Smart Watch Concepts
Sub Title:Taken form Samsung Patent Filings
Companies:Samsung
Products/Services:Galaxy Gear
Markets:Devices, Smart Watches
Years:2013

Apple

Following Apple CEO Tim Cook’s statements regarding wearable technology at the D11 conference in May 2013 which seemed to favour smart watch development over smart glasses, there is widespread belief that Apple is developing a smart watch. The company filed for the iWatch trademark in Japan, Russia, Taiwan, Mexico, and Turkey. In June 2013 leading Citi analyst, Glen Yeung, warned to expect an H2 2013 iWatch release from Apple according to this report from CNET.

Apple was reportedly recruiting wearable tech personnel in July 2013 to overcome design issues according to this Digital Trends report, which included the hire of former chief executive of French luxury group Yves Saint Laurent, Paul Deneve, for unspecified "special projects" work.

With Apple’s history of forward thinking designs, market watchers are eagerly awaiting an Apple smart watch and websites such as Pocket Lint has even drafted speculative concepts.

Microsoft

Microsoft is expected to launch its own Surface smart watch in 2014, which will run an adapted version of Windows 8. Although details are limited to date, the watch is expected to feature a radio and to be available in 6 semi-transparent colours according to a report from Mashable.

Hot Watch

In common with the Pebble and COOKOO smart watches, Hot Watch has received development funding via Kickstarter, and it is expected to come to market in December 2013. 

In addition to features such as call, calendar, email, SMS and social media notifications, the Hot Watch offers a built-in microphone and speaker which allows the user to engage in private phone calls. This watch, developed by US-based PHTL Inc., features an 8mm thin E-Ink touchscreen display and is compatible with iOS and Android smartphones. The Hot Watch incorporates Hot Gestures hand movement control and Hot Proximity Alerts which notify the user if their smartphone has been left behind or stolen.

Google

Following Motorola’s now withdrawn MotoActv smart watch and Google’s high profile Google Glass project, a smart watch release from Google is widely anticipated. The Wall Street Journal reported in June 2013 that Google was developing an Android-based wristwatch, which appears to be supported by a prior May 2013 US patent application by Google.

Other Vendors

Acer has confirmed a smart watch product release in 2014 as reported by PC Advisor and LG is also said to be working on a smart watch device according to a Gizbot report.

Smart Watch Pricing

Title:Smart Watch Retail Prices
Companies:

Sony Pebble COOKOO

I'm Watch Samsung Kreyos Geak Watch Sonostar

Products/Services:

SmartWatch Standard Model Limited Edition Galaxy Gear Metor

Smartwatch

Markets:Devices, Smart Watches
Years:2013

Key Features: Current Generation of Smart Watches

Title:mart Watch Features: Existing Products
Sub Title:Features of Existing Products
Markets:Devices, Smart Watches
Years:2013
Other:Bluetooth, GPS, NFC Incoming call alert and/or pick-up Missed call alerts Social media notifications (Facebook messages and posts and Twitter mentions) Email notifications and viewings Text message viewing Calendar reminders Smartphone location alert Music playback (remote control access to smartphone music library) Low battery alert (smartphone and tablet) Sports performance data (pace tracker, pedometer, calorie burn count, timer, heart rate monitor) Gesture control Google Voice SMS Movie playback Camera FM radio Timer and alarm alerts Voice-to-text input Voice control (device only, not network level e.g. Voice search) Wireless charging Motion control (e.g. Raise hand to ear to answer call)

Analysis

Device Market Favours Multiple Device Types

Over the last 20 years mobile device vendors and their component suppliers have invested 10s of billions of dollars in miniaturising all the device functions that are required to produce a smartphone.

RF front end modules are now the size of a thumbnail, RF antennas have been shrunk to the size of a matchstick, cameras that have semi-professional optics have been shrunk to the size of a few millimetres. 

Meanwhile, processor performance, memory capacity, video processing performance and screen resolution have all improved dramatically while chip sizes have decreased – all while battery capacity and life have increased.

With such a powerful array of building blocks, one might have expected to see the emergence of a single device format that would ‘do it all’. However,  rather than converging on a single device format, the market is clearly moving in the opposite direction: it is now clear that user needs will in the future be served by a range of devices, each of which is optimised for a specific class of use cases.

Here are some examples of this trend:

  • Augmented reality and personal navigation features would be best implemented using a product format like Google Glass;
     
  • The keyboard-based PC format will continue to be best for intensive content creation tasks;
     
  • Tablets, on the other hand, can provide a faster and more enjoyable web browsing experience than is possible with a PC.

As far as device requirements are concerned, as the market matures we see two key forces driving the market towards a ‘portfolio’ of device types:

  • A constant stream of new service propositions: New applications, new services and new features mean that the ways in which users engage with their device are still evolving;
     
  • Increasingly complex user interactions: Users are now experiencing services using a combination of visual, aural, touch, location and motion-based stimuli which makes it extremely hard to see how one device type (e.g. a smartphone) could do everything without compromising the user experience somewhere.

Therefore, as far as device vendors are concerned, the main design problem today concerns the user interface and, specifically, deciding which functions are best performed by one type of user interface (e.g. a touch screen) compared with another (e.g. a keyboard), compared with another (e.g. TV remote).

Multiple User Interfaces

Because some use cases originally envisaged for a smartphone (e.g. web browsing, book reading) are better performed on a tablet than a smartphone it is natural to ask whether there are remaining smartphone use cases that could result in the emergence of a new type of device.

We think that tasks like making a call, reading a message, entering a note, conducting simple searches, managing a calendar, setting an alarm and many more could be accomplished more easily using a different type of device altogether: the smart watch. 

This new type of device in our view includes two key technological elements:

  • Wrist-mounted electronic device
     
  • Voice-based user interface

Wrist Mounted Electronic Device

From the previous sections of this report it is clear that the present generation of smart watches mainly act in conjunction with a wirelessly tethered smartphone or tablet. The present generation of smart watches is focused on controlling certain smartphone functions and rending certain types of information (e.g. a notification that an email has arrived).

Looking ahead, we see smart watches arriving that include SIM cards and all the electronics and software needed for the device to function as a mobile phone.

The main reason why smartphones are the size they are today is due to the display (which has to play high-quality video and be large enough to provide a satisfactory gaming, video and web-browsing experience) and the user interface which is based on finger touch. A large, high-resolution colour display and the need to play feature films in HD means that the battery needs to be large and heavy as well, which further increases the physical size of the device.

If we remove the need for a large display (we think that watching movies, playing games and browsing the web are not use cases for smart watches) then this immediately reduces the size of the device. Removing the need to play video also means that power-hungry graphic processing chips are not required, which saves further space and also means that the battery can be smaller. If we are also thinking in terms of a voice-based user interface then the device does not have to support a touch-based user interface and so the device can be really small.

This means it is already technically feasible to create a small ‘watch-sized’ device that functions as a mobile phone: all the required building blocks already exist and it is 'simply' a case of putting them all together. We are not saying that this will be an easy job, but then nor was the development of a smartphone. If the right sort of company was minded to develop such a product then it could be brought to market quite quickly.

If this device were to be combined with a small in-ear loudspeaker then we think that the user would be very close to the sort of communications concept that was seen in Sci-Fi movies many decades ago. 

We strongly believe that a device like this will be introduced in the next 6-18 months, and, as mobile technologies continue to evolve, this sort of device concept will become the norm.

Rather than being more expensive than smartphones, in the long term (because they involve less material than a smartphone) a wrist-mounted mobile phone would actually be cheaper than a smartphone. This is why we note that in our forecasts section our projections for the worldwide smart watch market in 2018, at 214 million units is, if anything, conservative.

Voice-based User Interface

The invention of the graphical user interface and the mouse transformed personal computing by making it easy for non-programmers to use computers.

We think that the mobile device market is at the point where a voice-based user interface could transform how mobile devices are used and that this new, voice-based UI would be mainly implemented using a different type of device: a smart watch.

The reason why we think this leap will happen is that users would find it easier and faster to carry out many routine tasks, such as ordering a pizza, sending a group message, arranging a meeting, making a call, playing music or receiving notifications.

We think the convenience and usability benefits offered by such a UI would be compelling, especially if integrated into a wrist-mounted device.

To better explain our vision for what the smart watch could one day become consider one common use case: arranging a work meeting:

Title:Example of How a 'Smart Watch' Can Offer a User Experience that is Far Superior to Today's 'Smartphone'
Markets:Devices, Smart Watches
Other:The 'smart watch' use case outlined here assumes that the smart watch incorporates a voice-accentuated UI, an AI engine that is optimised on an app-by-app basis and a service delivery infrastructure that is accessed in real time over the web.
Other:Source: Generator Research

It is plain from this table that we see the smart watch category developing into something far more interesting than is the case today, where current smart watch products offer minimal incremental benefits to the users. 

The use case outlined above implies that the smart watch incorporates a voice-controlled UI, an AI engine that is optimised on an app-by-app basis and a service delivery infrastructure that is accessed in real time over the web.

Because the device would be connected to the web via a wireless connection, it would have real-time access to cloud-based services, data and network intelligence. 

Just as the building blocks needed to make a wrist-mounted mobile phone already exist so the building blocks needed to enabled the use case outlined in the right hand column of the above table also exist. However, it would be a lot harder to successfully integrate the various software aspects than the hardware elements.

Taken together, this sort of smart watch is no place for start ups: only the largest players in the mobile device and services markets could realistically take on the challenge. We think that this list is very short: Apple and Google and, maybe, Samsung. BlackBerry would be way out of its depth, while it is very hard to see how Microsoft - currently mired in CEO succession issues - would even know where to start (even though, on paper, the company has the required technical skills, mobilising the entire company to execute this sort of smart watch would be a huge ask, and would mean developing a completely new sort of mobile operating system - something that would never be approved until a new CEO is brought in from the outside who has Bill Gates's approval to tear up the playbook).

When the market develops to the point where this 'third generation' of smart watches arrives, and we think that this will occur within the next few years, then many mobile device users, would prefer a a smart watch, rather than a mobile phone or smartphone. Such users would carry a tablet and a smart watch and they would have no need for a smartphone. Other users, meanwhile, would have all three devices.

This is why we are projecting such a large ramp in sales of smart watches: as we will explain below, we see smart watches cannibalising significant segments of the mobile phone market and most of the mid-market of the watch market.

In summary, the enabling technologies that would form part of such a smart watch can already be seen in the market today:

  • Voice-controlled personal assistants: Apple Siri, Google Now;
     
  • Voice-controlled search: Google Voice Search;
     
  • Fingerprint-based device access technologies which would mean that users would not have to remember and type passwords into their device;
       
  • Cloud-based intelligence that mediates between the user and a range of services.

These are all difficult technologies in their own right and none have yet been perfected, but we think that a tipping point is approaching where it will be possible to take the next step and integrate all three technologies on a smart watch, at which point a new category of use cases, features and services would be enabled.

Implications for Mobile-based Operating Systems (OSs)

As we saw with Windows, it is very hard to take an operating system that has been designed with one device in mind (e.g. PC) and one type of user interface in mind (e.g. mouse and keyboard) and simply put that on a new type of device (e.g. tablet) that uses a completely different type of user interface (e.g. touch).

Microsoft tried this approach and it did not work, or, more precisely, it resulted in a compromised user experience.

Equally, we think that a fully-optimised smart watch OS which is based on voice control would require a major re-think in how a mobile OS works.

It may be that Apple, Google and Microsoft have already realised this and are thinking in terms of a new category of mobile OS that will be optimised for smart watches. If this is the case then the deep AI technologies that will undoubtedly form part of such a system would mean that there would only be a small number of companies who would have the resources and technological ability to develop such an OS.

It is for this reason that we see the smart watch OS of the future as being far more complex than today’s smartphone OS: the OS would include software elements that reside on the device and advanced AI-based software that resides in the cloud.

Implications for Apps and Developers

If we try to visualise a market where users are routinely using voice-controlled smart watches, then we think that the entire mobile app ecosystem would move into a new phase where apps would need to be voice optimised.

For example, returning to the example of the calendar app described earlier, then this app would not need to understand a concept like ‘order dominos pizza dayton’. People who were using such a calendar app would only need a relatively limited number of words. Indeed, it would be this fact that would make it possible to develop a very effective voice-based calendar app.

If this is the case then it is unclear where in the software stack the real intelligence would lie: would it be in the underlying operating system (device or cloud) or would app developers be able to optimise their apps for voice-based use which would allow them to differentiate their apps and services from rivals?

Apple

We think that Apple is the company most likely to launch a product that will transform the smart watch segment.

We would not want to discount Samsung, Google or other leading vendors, who have been active in developing new types of user interface: Nintendo, Samsung, LG and Microsoft have all been active in developing new types of UI for new product categories and we know that Google is busy working with watch-type concepts.

Nevertheless, it is significant that Apple was the first company to successfully commercialise the graphic user interface and mouse for the personal computer and so we think that history at least suggests that the company can do this again. We think that this will be a critical phase for Apple: if the company can indeed 'do it again' then the company’s value could increase dramatically. But if Apple delivers a “me-too” smart watch, or is eclipsed by Samsung or Google in this critical market segment, then the reverse could happen.

Putting a future internet television product to one side, we think that smart watches provide Apple with probably the last opportunity to create a huge, new global industry. If Apple delivers a smart watch product that is close to the vision outlined in this report then we think that the company will be catapulted into a new phase of growth.

If, on the other hand, the company fails - or, even worse - is eclipsed by Google then the market will realise that Apple's best days are in the past and that the company has lost its magic touch. In this case Tim Cook would become a lighting rod for investor angst and market disappointment. 

We have based our projections on a number of assumptions about what Apple will do in the smart watch market and some of these key assumptions are:

Advanced Features

We do not expect Apple to introduce a ‘me-too’ smart watch product. We think that the company already fully understands the long term potential of the smart watch market (as outlined above), which explains why the company is taking so long to develop the device.

We fully expect the company’s first smart watch product to deliver a ‘wow’ factor akin to what greeted the iPhone.

Launch Date and Sales in First Year

For the fiscal year ending 30 September 2007 Apple sold 1.4 million iPhones. However, the iPhone was launched in June 2007, at the end of Apple’s third fiscal quarter, and so this figure only relates to 3 months of actual sales. Furthermore, at this time, Apple only had a handful of carrier relationships and the device was only available in the U.S.

If we assume that Apple launches a smart watch product in June 2014, then we think that sales in fiscal 2014 will be far higher than 1.4 million units partly because the company now has hundreds of carrier relationships and secondly because the device will be made available on an international basis at launch – which is presently standard practice for Apple's new product releases.

Hence, we project that the company could sell 4.0 million units in calendar 2014.

Sales Ramp-up

Looking beyond 2014, we see the sales profile for Apple’s smart watch being comparable to what the company achieved with the iPhone. The main reasons are:

  • The product would be priced at a lower level than the iPhone: we are assuming an ASP of USD 399 in 2014 dropping to an ASP of USD 392 in 2018. 

    While some initially thought that the relatively high price of the iPhone would be a barrier to sales, the utility of the device was sufficient that Apple could price the product at a premium. We think that the same will happen with Apple’s smart watch;
      
  • The company’s manufacturing infrastructure, global distribution network and retail channels that the company uses for the iPod, iPhone and iPad would also be applicable for the smart watch and so there would be no time delay required to develop new channels.

Some commentators have put forward the view that mobile operators would not be interested in carrying the smart watch as the device would probably not carry a SIM card and, therefore, would not be a direct source of incremental revenue. We disagree for three reasons:

  • This  is also the case for WiFi-only tablets – which most carriers are happy to sell;
     
  • The use cases we described earlier in this report suggest to us that the smart watch would enable incremental data usage because the device would make some smartphone use cases far easier and, therefore, more likely. Because mobile data is the main source of revenue growth for mobile operators, we think that smart watches would be viewed as a key enablers of data traffic;
     
  • Because the leading smart watch vendors, most notably Apple and Samsung, would offer features that worked across smart watches, tablets and smartphones it would make marketing sense for these products to be marketed together, including as a bundle – just as is presently the case where operators bundle data plans with smartphone-tablet combos, we think that operators would be keen to offer the same type of deal with smart watches.
Title:Comparative Worldwide Shipments Apple iPhone, iPad & Smart Watch
Companies:Apple
Products/Services:iPhone, iPad
Markets:Devices, Smartphones, Tablets, Smart Watches
Other:Source: Generator Research
Pricing

We have assumed that Apple will introduce two smart watch models:

  • Model 1 (June 2014): Launch price USD 399, rising to USD 450 in 2018

  • Model 2: (June 2015): Launch price of USD 299 rising to USD 330 in 2018

The price rises are again similar to what Apple has achieved with the iPhone and are due to increasing sales of device-related content and services.

Product Variants

We have assumed that Apple will introduce an initial smart watch product in June 2014 at a price of around USD 399 with a second model being introduced in June 2015 at a price of USD 299. This pricing strategy mirrors what the company has followed with the iPod, iPad and, we believe, what the company will soon do with the iPhone.

Impact on Watch and Smartphone Markets

Watch Market

The worldwide mechanical watch industry was radically altered by the development of digital watch technology and although Swiss-based Swatch fought back with a new approach for mechanical watches that focussed on style and fashion, the mechanical watch market has never recovered, except at the luxury end where sales have been unaffected.

Title:Average Export Price per Finished Watch: Leading Countries
Markets:Devices, Smart Watches
Years:2009, 2010, 2011, 2012
Countries:Germany, France, Switzerland, China, Hong Kong SAR, China
Other:Source: Generator Research

If only because it has happened before, there is no reason why today’s watch market will not be transformed again as the smart watch market develops.

We do not foresee a threat to the top end of the watch market: it is very hard to see how demand for luxury mechanical watches will be affected by smart watches, no matter how sophisticated or fashionable they become. The main reason for this is that buyers of luxury watches are not seeking functionality, usability or productivity benefits, per se, they are seeking intangible benefits, such as perceived social status and this will not be a focus for smart watch vendors whose brands are in any case not relevant to those seeking such intangible benefits.

Likewise, the low end of the watch market will not be affected by smart watches. According to the Federation of the Swiss Watch Industry, a total of 1,077 million watches were exported by the top 6 watch-making countries in 2012. This represented the vast majority of worldwide watch production in 2012. China and Hong Kong together accounted for 94% of this output, or just over 1 billion units. However, the average export price for these watches, as shown in the above figure, was just USD 7.7 (China) and USD 28.2 (Hong Kong) – far below the retail price level for smart watches.

With the top and bottom ends of the watch market safely out of reach, it is the middle market that will be challenged: we estimate that this segment of the watch market is presently about 100 million units per year: in time, most or all of this could be cannibalised by smart watches, except for specialised market segments such as diving watches and altimeter watches which will continue to grow.

Smartphone Market

If the smart watch category progresses far beyond its current phase, which we regard as little more than a niche market, and into a new product category that is based on a new type of voice-controlled user interface that includes AI (artificial intelligence) elements, speech to text functions and a completely new category of voice-optimised apps, then we see smart watches eventually replacing a substantial portion of the smartphone market.

Worldwide smartphone shipments in 2018 will be around 2.3 billion units, up from about 1.4 billion units in 2013. In the future we can foresee a market outcome where sales of standalone smartphones (as we presently understand them) start falling because of increasing sales of smart watches.

Even in the far future, smart watches will not completely replace smartphones because some users will want a small data-entry device that also can be used as a phone. However, users who value the many convenience factors offered by a smart watch, but who also need access to the web and their movies, pictures etc, will carry a tablet as well. Meanwhile, some users will carry all three devices, and this will certainly be the case in the first phase of the market's development.

Market Forecast

Key Assumption: Current smart watch products not aggressive enough

Our projections are based on a number of assumptions about how the smart watch market will develop.

The most important assumption is that the incremental value being offered by the smart watch products available today is insufficient for the category to grow into a huge global market.

Smart watches presently resemble ‘dumbed-down smartphones’ or ‘sexed-up wristwatches’ and neither of these approaches will be successful in stimulating mass demand.

In order to truly excite consumers and create demand on a mass, global scale, smart watch vendors must approach the market far more aggressively than is presently the case: what is required is an approach along the lines of what we have outlined in the Analysis section of this report.

Because we think that the leading vendors already understand this, our forecasts are based on an assumption that a new generation of smart watch products will appear over the next 18 months that will re-define the category altogether.

Unit Shipments and Market Value

Our analysis is that smart watches will become a huge global market.

We project that worldwide shipments of smart watches in 2014 will be in the region of 8.9 million units. By 2018 the total number of smart watches being shipped will have reached as high as 214 million units – a less aggressive ramp-up to what the tablet market has achieved.

In regards to market value, our analysis indicates that the retail value of the smart watch market will be USD 2.9 billion in 2014 and USD 62.2 billion in 2018.

Title:Worldwide Smart Watch Market: Retail Sales Volume
Companies:Apple
Markets:Devices, Smart Watches
Years:2013, 2014, 2015, 2016, 2017, 2018
Regions:Worldwide
Other:Source: Generator Research

Long Term Market Potential

While our projections might seem very optimistic, they could in fact turn out to be conservative.

As noted earlier, if the smart watch category progresses far beyond its current phase, which we regard as little more than a niche market, and into a new product category that is based on a new type of voice-controlled user interface that includes AI (artificial intelligence) elements, speech to text functions and a completely new category of voice-optimised apps, then we see smart watches eventually replacing a substantial portion of the smartphone market.

Considering that worldwide smartphone shipments in 2018 will be around 2.3 billion units, up from about 1.4 billion units in 2013, then a projection of 214 million units per year in 2018 is entirely possible for the smart watch market.

In the not-too-distant future we can foresee a market outcome where sales of standalone smartphones (as we presently understand them), initially in developed markets, begin falling because of increasing sales of smart watches.

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Over the Top (OTT) Internet Television: 2013

Detailed Worldwide Analysis & Forecasts


Date:10 Jul 2013
Pages:300
License:Multiple Reader
Format:PDF
Delivery:Download
Price: £395


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