Why Is Hewlett-Packard Launching a Luxury Smart Watch?

Many tech companies have recently launched smart watches and fitness bands to capitalize on the growth of the wearables market, which research firm ON World predicts will surge from 4 million shipments in 2013 to 330 million by 2018.

While the market is filled with similar-looking, boxy devices that generally don't last more than a day on a single charge, Hewlett-Packard (NYSE: HPQ  ) is working on a radically different device. HP has partnered with Gilt, a designer retail site, and hired designer Michael Bastian to create a luxury smart watch that doesn't use a touchscreen or require Google's (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) Android Wear OS.

Concept art for Michael Bastian's HP smartwatch. Source: Gilt.

Instead, HP's device runs on proprietary software that displays information about weather, stocks, and sports, and is controlled via the side buttons. The watch synchronizes with a companion smartphone app for Apple (NASDAQ: AAPL  ) iOS and Android, can last for a full week on a single charge, and is water-resistant. It also stands out because it looks more like a regular high-end watch than a digital device.

HP's smart watch certainly looks impressive, but winning the wearables market is still a long shot for HP. Let's take a closer look at the key challenges that HP's fledgling smart-watch business will face in the near future.

Trying not to miss another technological shift
HP's biggest mistake was missing the big shift toward smartphones and tablets that started with Apple's iPhone.

In 2010, nearly three years after Apple launched the first iPhone, HP acquired Palm to build smartphones and tablets. That was a terrible decision, since Palm's webOS held a shrinking 1.5% of the smartphone market when HP acquired it. The webOS-powered smartphones and tablets that HP subsequently launched were quickly crushed by iOS and Android devices.

HP eventually launched Android-based tablets and smartphones, but it was too little, too late. As a result, HP missed the opportunity to build up a base of users loyal to its brand and software ecosystem. That's the reason Apple, Google, and Samsung (NASDAQOTH: SSNLF  ) remain the top companies in mobile devices.

This lack of a mobile customer base will hurt HP's chances at selling smart watches, since consumers consider them to be extensions of smartphones. Samsung, for example, closely ties its Gear smart watches to the S Health software on its Galaxy phones. Apple's long-rumored "iWatch" will inevitably tie into HealthKit, its unifying framework for wearables and fitness apps.

LG's Android Wear G Watch. Source: Google.

But will HP repeat its past mistakes?
Considering that HP's smart watch runs on proprietary software instead of Android Wear, the device will be further isolated from the rest of Google's ecosystem. The device will also lack fitness-tracking features, which fitness bands like FitBit Flex and Samsung's smart watches offer.

HP hopes that the luxury appeal and battery life of its smart watch will set it apart from an incoming flood of Android Wear devices, but this plan could fall apart if the rumors about Apple's iWatch are true. The iWatch -- also rumored to be dubbed "iTime" -- will reportedly be a high-end device that doubles as a fitness tracker. Apple's acquisition of LuxVue, a power-efficient LED company, also suggests that the iWatch will last longer on a single charge than other devices.

UBS analyst Steven Milunovich believes that the iWatch will launch at $300 this October, then sell 21 million units in 2015 and 36 million in 2016. To understand how huge the iWatch could be, consider this -- Samsung controlled 71% of the global wearables market in the first quarter of 2014 with only a half-million shipments.

When we put these factors together, it's easy to see how the iWatch or next-generation Android Wear devices could wipe out HP's smart watch, just as iPhones and Android phones killed webOS phones in the past.

The business of mainstream smartwatches
While HP's luxury smart watch might not make a huge impact on the market, other companies are also launching smart watches that look more like regular watches.

Swatch recently announced that it will upgrade its Swatch Touch touchscreen watches with fitness-tracking features. The original Swatch Touch watches, which were launched in 2011, only offered spartan functions such as the time, an alarm, a stopwatch, and the date.

Meanwhile, a start-up named Kairo is developing a mechanical watch that has a transparent OLED screen on the watch face. Therefore, the watch normally looks like a high-end mechanical watch, but "transforms" into a digital one when notifications are received. Pre-orders are currently being taken for the device, which costs between $499 and $1,199.

Kairo's hybrid smartwatches. Source: Kairo.

The Foolish takeaway
All of these watches point to an upcoming divide in the smart-watch market -- one side that favors digital designs, and another than favors mechanical ones.

Fully digital ones might have more bells and whistles, but they are also bland and have short battery lives. Partially mechanical or hybrid devices will consume less power and be more aesthetically pleasing, but could lack cutting-edge fitness-tracking features.

HP will have a tough time carving out a niche in this market, but it's an ambitious, unique effort that stands out in a crowd of similar-looking watches from Samsung, Sony, and LG. At the very least, HP should be applauded for taking the initiative and developing one, instead of waiting for three long years as it did with smartphones.


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