Will HTC's “Me Too” Smartwatch Be Too Little, Too Late?

HTC (NASDAQOTH: HTCCY) will launch a smartwatch in early 2015, according to a recent report at CNET. This is a surprising development, since earlier reports indicated the Taiwanese smartphone maker had scrapped its efforts to enter the wearables market. Details are scarce, but HTC is reportedly biding its time to launch a wearable device that will "stand out" from competing devices.

Source: Wikimedia Commons.

Could this mysterious device finally get HTC back on track and offset years of market share declines in smartphones? Let's look at why HTC wants to expand into wearables, and why this "me too" effort might be too little, too late for the struggling company.

Why HTC wants to make a smartwatch
It's easy to see why HTC wants to expand into smartwatches -- its smartphone business is crumbling, while year-over-year growth in wearables is expected to outpace the growth of the smartphone market over the next few years.

Between 2011 and 2013, HTC's annual revenue fell 56% from NT$465.8 billion ($15.45 billion) to NT$203.4 billion ($6.75 billion). Over those three years, its share of the smartphone market fell from 9.3% to 2.5%, according to research firm Gartner. Rising competition from Samsung (NASDAQOTH: SSNLF) and other rivals backed HTC into a corner, while marketing blunders, delayed shipments, and a series of executive departures cast a dark shadow over the company's future. As a result, HTC's stock has plunged 90% from its all-time high of NT$1,300 ($43) per share, which it hit in April 2011.

That's why HTC is retreating toward fresher, burgeoning markets such as wearables. Research firm ON World forecasts that global smartwatch shipments will surge from 4 million in 2013 to 330 million in 2018. According to a recent report from Kantar Worldpanel ComTech, Samsung owns a leading 51% of the market, followed by Sony (SONY 0.31%) at 17% and Pebble at 6%. However, the market is still tiny -- Kantar estimates that in the U.S., Europe, China, Japan, and Australia, less than 1% of all consumers own a smartwatch.

Therefore, Samsung's early advantage could fade as the smartwatch market matures over the next four years.

Why it might be too little, too late for HTC
Yet I honestly don't believe HTC will fare any better with smartwatches than it did with smartphones.

The first problem is that Samsung and Apple (AAPL 0.64%) are leveraging their dominance of mobile devices to sell smartwatches. Most of Samsung's Gear devices are only compatible with select Galaxy phones, while the upcoming Apple Watch will only work with iPhones. The strategy is to promote brand loyalty by gluing users to these companies' ecosystems. Customers who prefer Samsung and Apple phones will likely buy the company's companion watches, and vice versa.

L to R: Samsung's Gear 2 Neo, Apple's Watch, Motorola's Moto 360. Source: company websites.

Google's Android Wear, a slimmed-down version of Android for smartwatches, is a wearable OS for companies that lack Apple and Samsung's mobile muscle. This caused a flood of "me too" Android Wear devices to fragment the rest of the market, where LG, Asus, Acer, Motorola, and other competitors reside. Since HTC no longer holds a notable market share in smartphones, its smartwatch will likely be just another Android Wear device competing against this tough crowd.

The smartwatch market is also evolving quickly. Right now, the low-end market is defined by fitness bands that have simple smartwatch features, including Acer's Liquid Leap and Sony's SmartBand Talk. The midrange market is filled with Samsung's Gear devices and products such as the Asus ZenWatch and Moto 360, which blur the lines between traditional watches and digital devices. The high-end market will likely be defined by Apple's Watch, which starts at $350, when it arrives next year. Unless HTC brings something new to the table, it won't last long in this brutal market.

HTC would have stood a better chance if Scott Croyle, the lead designer of the widely praised HTC One M8, was designing the watch. Unfortunately, Croyle announced in April that he was leaving the company.

A Foolish final word
In my opinion, HTC's smartwatch needs to address the common complaints made of first-generation devices -- poor battery life, awkward interfaces, and ugly designs -- if it wants its device to stand out in this crowded market. If not, the resources poured into making a smartwatch would probably be better spent on tuning the company's smartphone strategy and hiring a prolific new lead designer.