Why Smartwatches Aren't the Next Big Thing

Smartwatches, and wearables in general, are expected by some to be the next big thing. Samsung has already released some smartwatches, and both Apple (NASDAQ: AAPL  ) and Microsoft (NASDAQ: MSFT  ) are rumored to be developing smartwatches of their own. Along with Google's (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) recently announced Android Wear platform, it's clear that the big tech companies are betting big on the wearables revolution. Despite this, there are plenty of reasons to believe smartwatches won't be nearly as big as many people think.

What problem do smartwatches solve?
Smartphones have been wildly successful because they solved a real problem. Smartphones took certain tasks that were formerly performed on a PC and moved them to a form factor that can fit inside of a person's pocket. Checking Facebook on a smart phone, for example, is far more convenient than lugging around a laptop.

But smartwatches, with small screen sizes and limited functionality, don't make anything that one can do on a smartphone more convenient. Smartphones are already so portable that the need for general-purpose smartwatches just doesn't seem to exist. This is likely why Samsung's smartwatch efforts have thus far failed.

Samsung's Gear 2 Smart Watch. Source: Samsung.

There's only one use case that I can think of where smartwatches are actually useful, and that's fitness. While a smartphone can be strapped to one's arm, it's not an ideal solution, and it's difficult to use the phone in that state. Using a smartwatch as a fitness-orientated device makes a lot of sense. Fitness is the problem smartwatches are capable of solving.

Apple and Microsoft have the right idea
Both Apple and Microsoft are rumored to be working on smartwatches, and both are expected to focus heavily on fitness. Apple's iWatch will likely only work with the company's iPhones, and it's expected to feature more than 10 different sensors on board for tracking things like heart rate. Screen sizes may vary from as small as 1.3" to as large as 2.5", and the screens are expected to be protected by scratchproof sapphire glass.

Microsoft's device seems quite similar. It will likely work with all of the major smartphone operating systems instead of just one, but it too will focus heavily on fitness. Rumors point to Microsoft making the APIs for the device open in an attempt to gain developers for the platform, and it will also reportedly feature as many as 11 sensors.

Although Apple's iWatch will likely sell well, given Apple's cult-like customer base, a fitness-focused device is unlikely to move the needle for the company. Apple sold 150 million iPhones in 2013, but if the iWatch will primarily be a fitness device, as the rumors suggest, only a fraction of iPhone users will have a use for it. The CDC estimates that only about 20% of adults in the United States get the recommended amount of exercise, and that could greatly limit the market for a fitness-orientated smartwatch. Even if Apple managed to sell 30 million iWatches annually at, say, $300 each, that's only $9 billion in annual revenue. For a company with $170 billion in total revenue in 2013, that's not very meaningful.

Of course, all that we know about the iWatch so far are only rumors, so all of this is speculation. One other possible use case for the iWatch could be medical applications, and given both the bevy of sensors on the device and that Apple has been assembling a medical technology team, Apple's aim for the iWatch could go well beyond fitness alone. This could greatly expand the market for such a device, although regulatory hurdles may stand in the way. 

What the iWatch will do is strengthen Apple's ecosystem, making the iPhone look more attractive, and if that's the goal of the device, then Apple will likely succeed.

It's unclear why Microsoft is even bothering to make a smartwatch, but it does make its own tablets and, with the acquisition of Nokia's phone operations, its own phones, so I suppose it's just an extension of the company's hardware efforts. If Microsoft can put together a high-quality, useful device, then the fact that it will be cross-platform could make it quite desirable. But like Apple, it won't have much of an effect on the company's top or bottom lines.

Google's strategy seems flawed
Google is going with a different strategy, creating a smartwatch platform and allowing OEMs to come up with their own devices. The idea behind Android Wear is that it displays useful information when you need it, such as weather, scheduled items, commute times, and other pieces of data.

Moto 360 from Motorola running Android Wear. Source: Motorola.

But so do smartphones. It seems like the point of Android Wear devices is to allow people to avoid having to take out their smartphones. That's not exactly a huge burden being lifted. Android Wear has fitness functions as well, but the devices are likely to be far broader compared to Apple's or Microsoft's products.

It seems like Google is just throwing Android on a smartwatch and hoping that OEMs can figure out how to make it work. This is the exact opposite of what Apple is doing, developing a device aimed at a specific function, and I doubt that Android Wear devices will find much success.

The bottom line
Smartwatches that attempt to do the same things that a smart phone can already do are bound to fail. Both Apple and Microsoft are reportedly building devices where fitness is the main focus, and that's the only use case that really makes sense for smartwatches. Google's strategy seems flawed in contrast, and I doubt Android Wear will see much success. Regardless, the market for smartwatches is unlikely to be anywhere near the size of the smartphone market, and it will do little to help the bottom lines of Apple, Microsoft, or Google.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 15, 2014, at 1:01 PM, jdmeck wrote:

    Don't need to move the needle, just keep it from falling.

  • Report this Comment On July 15, 2014, at 1:08 PM, twolf2919 wrote:

    "smart watches...don't make anything that one can do on a smartphone more convenient"

    that is obviously a false statement as one could think of hundreds of little activities that would be more convenient with a smart watch than without one. Answering a phone call or checking who the latest message is from *without taking ones phone out of ones pocket* are obvious examples. Asking the voice assistant a quick question (and getting the answer) - again, without fishing ones phone out of ones pocket - is another.

    The real question is whether these conveniences (plus the health/sports monitoring capabilities you mention) are worth the negative of having to strap on and charge yet another device - or the price being charged.

    I would not hesitate one minute to buy a $300 iWatch if it made the above example use cases possible and it had some health monitoring capabilities....PROVIDED it either didn't need charging every day or it could be charged wirelessly on the same charging pad as the iPhone 6.

  • Report this Comment On July 15, 2014, at 1:18 PM, twolf2919 wrote:

    Another thing to consider: even if the watch itself doesn't move Apple's revenue needle that much, it may help drive further sales of iPhones since it extends the the phone's capabilities. Heck, given that Apple is going into Home automation business and possibly even into the mobile payments, I could see a smart watch becoming important there too (in home automation, the watch could be used to easily control home devices; in the mobile payment space, it could be used to authorize a payment (provided the watch had touch id).

    Apple, being both horizontally (across devices) and vertically (from services to the OS) integrated, is the only company that will be able to offer smartwatch-based capabilities across all these areas.

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