Even rivals are waiting for Apple to get into wearables

Market not worth spit much less the time and money unless <i>someone</i> transforms the category, argues analyst

There may be big expectations for the embryonic wearables market, but the reality is that until someone transforms the category -- Apple's the usual suspect, as it at least has a track record of doing that -- it won't break out of a very small constituency, an analyst said today.

In a research report issued to his clients last week, Jan Dawson, chief analyst at Jackdaw Research, argued that the market for smartwatches as they now exist is tiny: No more than 10% of the population.

Demand is weak -- "[The market] appears to be providing a solution to a problem few consumers have," Dawson wrote -- and he called the current crop of smartwatches so "underwhelming" that they were unlikely to capture even a small fraction of the possible 10%.

By "smartwatches," Dawson meant the archetype for the category, a wrist-worn companion to a smartphone, or in some cases a tablet, that includes a display and serves a mix of several functions, including telling time, showing notifications, providing identity and payment authentication, and tracking health and fitness.

But consumers aren't breaking down any doors to use those functions now. Because smartphones aren't universal -- Dawson pegged the percentage of the U.S. adult population with one at 50% -- and few smartphone owners are heavy notification users, only about a third of the population rely on notifications at all and just 14% for more than two apps.

Health and fitness trackers, meanwhile, are also a niche, with only about 20% of the adults in the U.S. and U.K. reporting that they use or have tried a device, which typically syncs to a smartphone, tablet or PC for record keeping. As other analysts have pointed out, Dawson said his surveys showed that nearly half of health and fitness tracker users tried one but then later stuck it in the drawer.

In other words, the most widely-cited and -served functions of a smartwatch appeal to a small minority of people. That's not encouraging.

Nor does there seem to be much short- or medium-term hope in some of the things touted as possible applications of a smartwatch, like mobile payments, which require an as-yet-non-existent infrastructure.

Obviously, Dawson was not bullish on today's smartwatches. In fact, he recommended that existing vendors pare their investments and that others pondering the market stick to the sidelines unless they can significantly differentiate their products. "We would advise most would-be vendors to stay out of the market," Dawson wrote in his report.

But wait, there's more

His caveat, however, was huge.

"Two major things could catalyze demand in this market: a player overcoming the significant technological challenges associated with the current smartwatch model, or a player which breaks the model and reinvents the category," Dawson said.

He named Apple as one company, but not the only one, that could do either, or both. Dawson's basis for that thinking: Apple's proven ability to enter an existing market, then dramatically change expectations to the point where it creates a viable market. Whether with 2001's iPod, 2007's iPhone or 2010's iPad, Apple, Dawson maintained, is the only technology company that could boast a track record in transforming an extant market.

"If Apple does enter the wearables market, it will do the same [as in the MP3, smartphone and tablet markets]," Dawson said. "Given [that], we believe this will have to be done by reinventing the smartwatch category in some way."

The most popular use of notifications on smartphones is for text message alerts; the same is likely the case for the current crop of smartwatches. (Image: Jackdaw Research.)

Dawson didn't have any special insights into what Apple might do in wearables/smartwatches -- rumors, circulating for ages, have intensified in 2014, with most Wall Street and industry analysts now believing Apple's entry is inevitable -- but he had some thoughts on what would happen if Apple did do as he predicted.

If Apple can reinvent the category as it has in the past, Dawson believed that it would kick off demand for wearables overall, just as it did with smartphones, and to a lesser extent, music players and tablets. "A rising tide floats all boats," Dawson said in an interview today.

That's not guaranteed, of course: It depends on what Apple ships. "If it's close enough to the current category, what Apple offers could prompt people without an iPhone to buy one. In that sense, if it does enter with a traditional smartwatch, there could be a halo effect," said Dawson, talking about iPhone sales.

He assumed that if Apple stuck to the current smartwatch model, but was somehow able to hurdle a host of technological challenges -- ranging from a thin, fashion-sense design to a long battery life -- it would both garner sales of the device(s) and boost those of the iPhone.

Such a strategy would not dramatically transform the category, however, and would not put much if any distance between Apple's offering and those from already-in-the-market makers, like Samsung or Pebble, or Motorola's Moto 360, which relies on Android Wear, Google's wearables OS. Fast-following, then, would be a distinct possibility.

But if Apple really leapfrogged the competition with something completely different, then bets are off. "Depending on what Apple launches, and the amount of innovation [in it], will drive how quickly others can copy it," said Dawson in the interview.

If Apple's able to reinvent the category, it "may take quite a while for others to catch up," Dawson continued. "The more different it is, the harder that's going to be."

Dawson cited the iPhone as an example. On the one hand, Apple essentially built the smartphone market, as we know it now anyway, giving now-rivals like Samsung an opportunity. On the other hand, because the iPhone was radically different -- largely because it was touch-based -- it took competitors a long time to replicate the iPhone.

"When the iPhone launched, it was very different from anything prior," Dawson contended (emphasis in original). "So it took a long time for Android [and Android phone OEMs] to even vaguely match it. But the iPad was basically a big iPhone, so you just stretched your smartphone and you had an iPad competitor."

Dawson expected that the situation for Apple's rivals, again assuming that the Cupertino, Calif. company hits the "reset" button for the market, would be more like the iPhone than the iPad. "I may have a product that matches [Apple's wearable(s)] on paper, but do I have a product that performs as well in fact?" asked Dawson. "It could be several years before others are truly competitive, even if within a year their wearables look similar on paper."

Cupertino...the world's R&D?

Some smartphone vendors have been raked over the coals for allegedly copying Apple's iPhone and iPad -- the most recent allegations have been aimed at China's Xiaomi -- and the same charges will probably be leveled at rivals that try to capitalize on Apple's entry in wearables.

Do others, then, simply use Apple has a free R&D arm?

"In a matter of speaking, I'd say 'yes,'" said Dawson. "The fast-follower thing has worked for smartphones."

Although that must irk Apple -- it certainly did that, and more, for former-CEO Steve Jobs -- Apple also gets something out the deal: The top of the market pile, at least for a time.

And that position, as Apple has found out, can be very lucrative. In the first three years of the iPad, for example, Apple recorded revenue of $67.7 billion.

"Apple's role in this market is hard to overstate," Dawson concluded in his written report. "If it enters sooner rather than later, we believe it will have a significant impact both on the smartwatch market and on Apple."

Dawson's report is available on the Jackdaw Research website to paying customers.

Read more about emerging technologies in Computerworld's Emerging Technologies Topic Center.

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