The Apple Watch and other wearables face 3 big hurdles

While the Apple Watch has prompted wider interest in wearables, its arrival has also prompted renewed questions about how valuable the devices are and how safe is the data they collect.

While the Apple Watch has fostered wider interest in wearables, its arrival has also prompted renewed questions about how valuable wearables are and how much they could undermine privacy.

At its World Wide Developer Conference (WWDC) next week, Apple could provide a glimpse at how its latest invention has done since Apple Watch sales started in April. Apple is also widely expected to add rewards capability to Apple Pay, its mobile payment service that works with recent iPhones and the Watch.

Yet, several analysts said their opinion polling shows that users, especially in the U.S., don't care that much about making mobile payments from a smartwatch or even a smartphone.

To address an even more basic concern: Analysts question whether users really need or want a $349 (or much costlier) smartwatch that functions like a mini-computer (usually when connected to an expensive smartphone), when they might be perfectly happy with a much cheaper $100 fitness band from Fitbit or even something less expensive from Xioami.

New IDC data supports Fitbit's value

IDC on Wednesday released wearable market data from the first quarter of 2015 showing that Fitbit far outdistanced other wearable device vendors, shipping 3.9 million of its new Charge, Charge HR and Surge devices, its older Flex wristbands and two clip-on models.

The total wearables market was 11.4 million devices, IDC said. After Fitbit, the other top vendors in descending order are were Xiaomi, with 2.8 million devices; Garmin, with 700,000; Samsung, with 600,000; Jawbone, with 500,000; and all others combined, 2.9 million. (The Apple Watch didn't go on sale until after the first quarter ended.)

IDC analyst Ramon Llamas said in an interview that the Fitbit's success can be attributed to low prices, usually starting at about $100, but also to its clear focus on fitness, from casual exerciser to the committed athlete.

Fibit's prowess has bearing on the overall value of the smartwatch market, which includes one of the oldest smartwatch makers, Samsung. Samsung finished in fourth place even though it started selling smartwatches in 2013 and now has five Tizen-powered Gear smartwatches and the Android Wear-powered Gear Live. Other Android Wear smartwatch makers like Motorola (Moto 360) and LG (LG G Watch) didn't break into the top five, IDC found.

Xiaomi of China landed in second place for the quarter with its Mi Band, a smart bracelet that sells for just $20 on Amazon and links to various iPhones and Android phones.

Against that backdrop, analysts see three big dilemmas facing smartwatches and other wearables.

How valluable are wearables to users?

The consumer value of smartwatches, even Apple Watch, is still unproven.

"Buyers get the value of the fitness band [like Fitbit], but with the smartwatch, there's still a lot of questions," Llamas said. "So there's pressure on the smartwatch to prove its value. That includes: What can I do on my smartwatch that I can't do on my smartphone?"

Clearly, there's a drive by manufacturers to make smartwatches work more independently of Bluetooth- or Wi-Fi-connected smartphones, but the rollout of those functions has been slow.

With the launch of the Apple Watch, some observers predicted a fire sale of other wearables; Llamas predicted that probably won't occur.

"The Apple Watch is backed by a great company, but it's still more expensive than many wearables and I have to be an iPhone owner to user it," he said. "So that leaves out a big chunk of the market, which is filled with plenty of other devices. With its entry-level price above $300, that's outside the realm of most people."

Meanwhile, Samsung has been in the smartwatch market for two years, and hasn't had nearly the impact analysts expected. The same could be said for the seven different Android Wear smartwatches now available.

Neither Samsung nor Apple is likely to make their smartwatches work with smartphones other than their own, which could hold them back, Llamas said. Meanwhile, many fitness bands and other smart wristbands work across platforms, which works to help their adoption.

Llamas predicted the Fitbit will hold onto its niche with a strong devotion to fitness. "Fitbit won't become more like a smartwatch," he said. "Having something like Facebook on Fitbit is not really their thing. They want a really good device for health and fitness and to use for going outside."

Who wants mobile payments anyway?

Mobile payments won't likely drive the value of wearables, at least in the U.S., anytime soon.

Despite Apple's push for Apple Pay and the use of that mobile payment service with the Apple Watch, analysts are pessimistic about the popularity of mobile payments from smartwatches and smartphones.

That sentiment didn't stop Google from unveiling Android Pay at Google I/O last week; Android Pay will work with the upcoming Android M release for smartphones, but its future for Android Wear smartwatches and smartwatches that support NFC (Near Field Communication) payments remains unclear.

IDC analyst Will Stofega said in a podcast this week that IDC surveys have shown Americans "are not that interested" in mobile payment services and predicted it will be a long "slog" toward adoption.

His view matches those of other analysts that Americans are just as happy using credit cards -- and cash -- for in-store payments. U.S. merchants are slowly updating their in-store payment terminals to support more secure smart cards and NFC chips in the latest phones. Still, there's widespread acknowledgment in the industry that it will take five to 10 years to have payment terminals installed in 90% of the estimated 12 million U.S. retail locations.

"I just don't think consumers see mobile payment as a need; credit cards work just fine," Carolina Milanesi, chief of research at Kantar WorldPanel, said recently. "If consumers have it, they might use it, but it is not an adoption driver for the hardware."

Coupling mobile payments with rewards could change that, however.

Apple is highly committed to mobile payments, of course, and is expected at WWDC to link Apple Pay with shopper rewards and various special offers. Conceivably, Apple or various merchants' reward cards and coupons could be automatically applied at the time of a mobile purchase. Android Pay is supposed to offer similar capability when it becomes available.

The linking of reward cards and shopper credits with a smartphone or smartwatch used for payments could provide the needed breakthrough to nudge Americans into wider acceptance of mobile payments.

"Linking rewards with payments will make the user experience with wearables more sticky," Llamas said. "You would be putting the carrot out in front of them, which helps answer the question they have of 'what's in it for me.'"

What happens to the data?

Analysts have noticed in polling and interviews that younger wearable users aren't especially concerned with the collection of their personal data, including GPS location, health metrics and more. But maybe they should be.

"All the health data you're revealing is incredible stuff," Llamas said. "Giving out your location is even more hazardous."

Llamas raised the potential that a nefarious hacker could find a Fitbit user's running habits and location, discover the runner was out every other day, and use this information to break into a home.

"We're talking about something incredibly problematic," he added. "Somebody accessing the data store could mess around with your fitness results, and affect your meds. It's really scary."

While many wearable makers insist they don't share personal data collected on the devices they sell, there is a growing industry in selling the collected data in bulk, from perhaps millions of users, to help a company market products and services to wearable users generally. The bulk data being sold is supposedly anonynimized so that a user's name and other identifying information is left out. But experts believe the software designed to delete identifying information isn't complete or reliable.

Also, comparing a user's location with his or her health data and shopping patterns makes it possible for a hacker to determine who an individual is -- even without that person's name or typical identifying information, Julia Horwitz, director of the consumer privacy project at the Electronic Privacy Information Center, said in a recent interview.

Irina Raicu, director of Internet ethics at the Markkula Center for Applied Ethics at Santa Clara University, recently urged wearable users to demand clear information from wearable makers about how the collected data will be used before allowing it to be collected.

Analysts such as Forrester's Fatemeh Khatibloo recently said government entities, especially in the U.S., need to make sure manufacturers are getting permission to use a person's data. Government oversight is also needed in how collected data is kept secure by various companies and groups. "I don't think self-regulating trade bodies will do [all] that effectively," she said.

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