Two Scenarios for the Smart Watch Market
At this years International CES, we had the honor of moderating the smart watch super session. We dove into a range of subjects but also offered the audience to download our latest smart watch report highlighting our high level thoughts on the market as it stands. Below is a highlight from the report where we outline two scenarios we could see happening with the market.
Apple will easily strongly influence the smart watch category in 2015 and 2016. It is hard to argue against Apple’s vertical advantage and tight control of their entire ecosystem. This advantage undoubtedly will give them a dominance in the early stages of a category. If a number of things play out, we can see them command the category for the long term.
Apple had a near monopoly on the iPod/MP3 market. We can see a similar scenario playing out where Apple effectively “iPods” the smart watch category, maintaining dominant share over the next five to seven years. While the early success of the iPod was driven by Apple releasing iTunes for Windows, we don’t see the need for Apple to support other platforms in order to hold sway over the smart watch category. Apple’s existing iPhone customer base is large enough to keep it the foremost smart watch vendor and their smart watch platform as the reigning one in the smart watch category.
Apple is blessed by their developers and always has been. Developers for the Apple Watch will make or break the product. To dominate the category, Apple’s developers will tightly integrate the Apple Watch experiences with their apps and drive compelling use cases into the mass market. Apple’s developers are a large part of their competitive advantage for iOS and this extends to the Apple Watch making it very difficult for other smart watch platforms to commit and attract developers or build an ecosystem. I believe, for the smart watch to go mainstream, it will take an ecosystem and Apple has history in their corner when it comes to building for a category.
Key assumptions for this scenario:
- Competing analog watch vendors like Swatch, Omega, Seiko, Citizen, and many other brands selling watches below $700 avoid making a smart watch of their own as they fear it simply becomes a race to the bottom. Instead, they choose to simply maintain course and focus on analog watch products.
- Smart watch platforms become fragmented. Should some higher endwatch brands decide to make smart watches, they decide to try and create their own platform in order to maintain stronger differentiation and avoid a race to the bottom.
- Android’s ecosystem and customer base is not profitable enough to make it worthwhile for companies to support and develop for Android Wear.
- Google or any other smart watch platform OS (like Tizen for Samsung) succeeds at building a smart watch ecosystem for developers and core services.
#2 – Android Wear (or something else) Dominates Market Share
Another possible scenario is the smart watch category shapes up very much like the smart phone category. Apple succeeds at their goal to acquire the top 20% of the market and rake in the majority of the profits. While Android Wear, or another third party licensable smart watch OS, provides the software platform to the vast majority of hardware companies making smart watches.
In this scenario, the vast majority of Chinese and Hong Kong produced smart watches adopt Android Wear (or something else) and flood the market with very low cost smart watches. Also in this scenario, Swiss watch makers competing in the sub $1000 watch market start making smart watches because Apple Watch cannibalized nearly all the sales of Swiss-made watches in that price range.
Android Wear, or another third party, becomes the standard smart watch platform for the vast majority of watch makers and technology companies starting to make watches.
Key assumptions for this scenario:
- The vast majority of watches sold today go “smart” over the next five years and run Android Wear or another third party smart watch platform.
- Watch makers standardize on a smart watch platform and there is little to no smart watch platform fragmentation.
- Google or a third party standard platform is genuinely competitive with Apple’s.
It seems a safe assumption Apple will have the advantage in the early stages of the smart watch category. Like the iPhone, they have a five to seven year advantage on the competition. It is logical that Apple maintains an advantage in this market for at least two years, if not longer, and we feel scenario #1 is how the market will look for at least the first three to five years if not longer.
While there is a strong case to be made for scenario #2 simply because it is logical the competition will need to contend at some point with Apple and will have to choose a platform to use or create their own and the market may likely flood with low cost Android (or another third party) smart watches. It is unclear if these products will stick or be competitive.
A mix of both scenarios is possible as well. Apple may not be destined to be the only dominant vendor in the top 20% of the smart watch market but poised to have much higher market share even if not the total majority starting to make watches.