Wearables Winners and Losers, Apple and Samsung Bury the Patent Hatchet

IDC recently released wearable shipment data for the third quarter, and on this week's Technology Industry Focus we run through the market share breakdown by company and major trends in the data. 

After that, we wrap up by talking about the long-standing patent feud between Samsung (NASDAQOTH: SSNLF) and Apple (AAPL -0.81%) and how it might be finally coming to a close. 

A full transcript follows the video.

 

This podcast was recorded on Dec. 4, 2015.

Vincent Shen: Hello, Fools! This is Vince Shen filling in today for Sean O'Reilly on this technology edition of Industry Focus.

We are coming at you as usual from Fool HQ in Alexandria, Virginia. And today we'll be talking a little bit about... I think the overall theme is Samsung's woes, really, but in actuality some wearables numbers. Is that right, Dylan?

Dylan Lewis: Yeah, we're going to be getting in some recent data releases from IDC and kind of what the wearable landscape looks like. Touch on some more bad news for Samsung. Spoiler alert: The wearable numbers don't look too great, either. But they've had some other developments come out this week and we'll sift through that.

Shen: Sure. So can you tell us a little bit about these results that came out from IDC?

Lewis: Yeah. So IDC releases wearable shipment volume data on a quarterly basis and so earlier this week they released their most recent installment of that. No huge surprises here in terms of what the landscape looks like. It pretty much mirrors what we saw last time in terms of the top of the market share.

So Fitbit (FIT) came in with 4.7 million shipment volumes, Apple was second with 3.9 million shipments, Xiaomi in third with 3.7, and just to give you an idea of what that means in terms of the larger market, we saw about 21 million shipments. So the respective market share as a percentage for those three top players: 22%, 18%, and roughly 17.5%.

Shen: OK, OK. And where have you seen... where did we see some of the biggest shifts? I know that the Apple Watch came out I believe it was April of this year, so that kind of threw things a bit with a lot of new buyers coming into the market for the second quarter. And it looks to me like Xiaomi also had a really big boost for at least year-over-year for this most recent period.

Lewis: Yeah I think the tough thing when you look at this IDC data is, you know the wearables market is so nascent and there have been these weird hop-ins from major players at different times. So a lot of the data is really lumpy and you can't look. It's really kind of meaningless on a year-over-year basis or even sometimes on a sequential basis as we'll find out. Because the landscape has changed so dramatically in the course of even three months' time or six months' time. So if you want year-over-year growth, for what it's worth just look at what the whole market looks like.

Q3 2014 saw 7.1 million shipments, again a 21 million shipments in this most recent quarter, so that's good for almost 200% increase in total market size. Sequentially, we saw 16% growth. Q2 had 18.1 million shipments. So that might be a little disappointing when you think about the Q1 to Q2 growth, which was almost 60% sequentially. And this kind of plays into that lumpiness I was talking about a little bit.

So, again, the Apple Watch came out in Q2 and that was a product that added like 3.5, 3.6 million shipments to the category. And I think another thing that's important to keep in mind here is this is the quarter right before the big holiday sales rush. And so I wouldn't be totally surprised and maybe this is something you can add a little color on and you know you talk CG a little bit more. But I'm guessing there are some folks out there that have something like this on their wish list but or are thinking about buying it for someone else but are going to wait until either the sales that come with Black Friday season, Cyber Monday season, or are just looking to wait to give it as a holiday gift in general.

Shen: That is actually something I saw. There's definitely been some echoes that Apple will prove to be a big winner, I guess as usual for at least the Black Friday Cyber Monday period. Where their iPads and their Apple Watch saw a lot of buy-in especially with just a little discount that they need. I think it was like $50 off, for example, with Apple Watch to get people at the level where they would be willing to try it out.

They also launched like some native apps for the device, which I think have got people a little more excited about it, too. So I definitely think the Apple Watch was a hot item for the Black Friday period.

Lewis: Yeah. And looking at some of the other company-specific takeaways from this data release. You know, we talked about some of the big names. Garmin (GRMN -0.79%) kind of held constant at it being slightly relevant in the space, but not like really worth talking about all that much.

But I think the biggest surprise is the player that came in at No. 5, which is new to a lot of people, is Chinese manufacturer XTC, which is owned by BBK and they displaced Samsung to be the fifth largest wearable shipper in the most recent quarter. And I think the last time we did this check-in on this quarterly data about three months ago, we said Samsung was one of the biggest losers because you look at some of the big tech companies out there and they're owning the space.

Apple's coming in and immediately becoming the second biggest player. Samsung has been around for quite a while with products and hasn't really seemed to make it work. And they are losing market share to these tiny players that are just establishing themselves. And you think of the resources that are available to a big tech company like that and you have to think, "What's going on over there?"

Shen: Yeah, really the surprising thing for me too that when you mentioned with BBK's, they grabbed up that market share and was able to displace Samsung. It sounded like it was just from one device that they have that kind of targets younger consumers. So I thought that was really interesting. But in terms of a geographic basis, where else are you seeing where the market's really strong for wearable devices?

Lewis: Yeah, another thing that IDC noted in their release was how particularly strong the Chinese market was. So they said in a statement, "China has quickly emerged as the fastest-growing wearables market attracting companies eager to compete on price and feature sets." And you can't be surprised when you hear them talking about price competition there, right? You know, you immediately think of Xiaomi, which I think they make a $15 Mi Band. I think that's what it costs for consumers.

Shen: Oh, wow. I did not know it was that low a price.

Lewis: It's absurdly cheap. And a couple figures that just kind of underscore the rise of that market: 97% of volume for Xiaomi's Mi Band product shipped in China. And XTC, like I said, the fifth largest by market share, they claimed that position and only sold its phone watch product in China. So that was all domestic sales for them. They did not have any international presence.

So you look at the foothold that they're able to gain in this still-growing market and being able to do it in just one country. I think it's a testament to what the appetite is for this type of technology in China.

Shen: I guess another question going off of that in terms of seeing it as an opportunity or a threat to with Xiaomi is that they've seen such fantastic growth and they've hit so well in China, but people have talked about their smartphones being really competitive to, with high feature, great features, low price point, and the issue is that, for example, their smartphone market shares remain pretty steady about 5%. And that's pretty much solely focused in China.

So there's also this idea that will they be able to break into like these Western, non-China markets. And I think right now at least on the smartphone side, they're targeting Southeast Asia, India, and Brazil, but it will be interesting to see where they're able to, for their Mi band, expand that interest into the U.S. market, for example.

Lewis: Yeah, it might be something where someone that wants to try a fitness product but doesn't want to spend a lot of money on it -- you know tries it out first and then maybe they say, "Ah, you know, I kind of want something that has a little bit more built-out functionality. I like that it's able to do XY and Z but I want it to do AB and C as well." So it might be kind of like a gateway product for people here in the U.S., but I think you're going to see a lot of people in more developed markets looking for some of that name brand association.

Shen: To wrap things up, are there any other trends in the data that you wanted to mention?

Lewis: Yeah, I think something that's worth noting is it seems like there are kind of two distinct product categories here. Something that I've always been really interested with as far back as the Fitbit IPO and once we started getting rumors about the Apple Watch is, are these two different segments going to merge into one? And is there going to be one winner? Right?

And so, again, from their release, smartwatches have drawn increased attention to the market from likes of Apple, Motorola, Pebble, and Samsung. But this has not dampened interest in fitness trackers. By the end of Q3 2015, shipment volumes for both product categories increased sequentially and year over year, showing that for now the categories can coexist and grow. This also provides end-users with a choice in terms of feature sets and functionalities ranging from simple fitness tracking to smartphone-like experiences.

So it seems like IDC, at least for the time being, is saying there's stability in both of these markets and there are consumers that are interested in both ranges of product offering. And I think that's a little bit to the point of what we were talking about earlier, where maybe someone wants to try out a fitness tracker. They aren't sure they really want to commit to something that's as expensive as an Apple Watch or something like that. And they try something from Xiaomi or maybe one of the lower-level offerings from Fitbit. And kind of just whet their appetite a little bit and see if it's something they're interested in.

I don't know how long this is going to hold. I've always been kind of skeptical of this, but it's definitely something to continue watching.

Shen: I think the concern is that right now I think you either have your more higher-end smartwatch, right? And the functionality there is simply wider than like a fitness tracker that you might get from Fitbit. And while those feature sets remain separate, the price points also remain separate where you can get a Fitbit for like 50-60 bucks I think for their introductory models, whereas some of the nicer smartwatches will cost you several hundred dollars.

But I do think there's going to be a point at least technologically where they're going to be able to merge all of those things into one and it will be at a very competitive price point where people will think, I'll just get the smartwatch that also happens to have some of those health tracking features, for example. And you might start to see more consolidation.

Lewis: Yeah, you look at the history of tech gadgets and generally the all-encompassing device wins out, right? People very rarely want a dedicated device that is capable of doing one thing very well. They're OK with having -- unless you're using it for nautical GPS or something that is a very focused use, most people are OK with a good-enough product that has more range in functionality.

Shen: Maybe it's just kind of like the more basic digital cameras too and how they've kind of been like wiped out essentially by really nice cameras on smartphones. So now that for at least for dedicated cameras, you really are in the market of like DSLRs and higher-end equipment where of course that's going to produce a better quality image. But otherwise all the other point-and-shoots are pretty much not that popular anymore.

Lewis: Right. Another thing to look at that IDC noted was just that there seems to be some room in the middle of this market. So, again, from their report the average smartwatch or band came in at just over $400 and the average basic watchband came in around $94. This leaves a lot of room for new players like Fossil (FOSL -2.81%) and niche players like Pebble as they have an opportunity to address this space.

I don't know if we'll start to see the blurring of the lines there. I think Apple made it very clear that they want to have this luxury product and their pricing clearly indicated that. And the way that they rolled it out with these kind of like fittings and this very kind of like luxury high-designer-type atmosphere in the stores and the experience that they curated with that. And you totally see the opposite end of the spectrum with Xiaomi and Fitbit where they're much more accessible and very competitively priced.

So there might be some middle ground there where I think one of the criticisms with something like an Apple Watch is that it is not, it's not something that if I'm working out and doing some heavy workouts, lifting weights, if you like ding it or something like that, you'd be kind of annoyed, right? If you scratched it or you maybe broke the screen or something like that lifting, you know that's something that might happen, and so there might be this middle market here that develops.

Certainly, Fossil is publicly traded, so that's something to look at. I think IDC, a lot of the names that they're throwing out here are private players right now, kind of smaller players. But it will be interesting to see what Fossil does with that kind of space.

Shen: Yeah, and some of these other competitors like you mentioned with Fossil, a very significant portion of the market, 35% is still not those top five vendors that we talked about. So there's a lot of small players. You know, with Samsung getting knocked out, that doesn't mean that for the next quarter, especially with the holiday season where one certain product might get a lot of popularity and surge with sales, suddenly we have another new player or even two in that top five. I don't think we'll be able to unseat the top three, though.

Lewis: And so, I'm sorry, just to look at kind of what the market's doing in terms of reaction to this news. So this came out on Thursday, and as of midday trading on Friday, both Fitbit and Apple are up. Fitbit a little bit more so because obviously they're more exposed to that. Apple I think was maybe up 2% before we checked before taping.

So positive market reaction. Xiaomi is obviously private, so limited insight there. But the market seems happy with the news. They seem happy with that 16% growth. I wouldn't be surprised if it was higher in the coming quarter like we said just because boosted by holiday sales.

Shen: Sure. On the Apple side, some of these numbers, even for Apple Watch sales, even if they're really successful during the holiday season, it's still just a drop in the bucket for them.

Lewis: Exactly.

Shen: All right. Well, before we move on and really talk about that additional hit to Samsung that we mentioned earlier, I highly encourage our listeners to visit the newly redesigned Focus.Fool.com. There, you will find a special offer to join the Motley Fool Stock Advisor newsletter. You can have access to the special discount with Stock Advisor that works out to just $129 for a full two-year subscription. Just go to Focus.Fool.com to take advantage of this offer. Again that's Focus.Fool.com.

So, are Samsung and Apple kissing and making up here, or what?

Lewis: I don't know, maybe they get into the holiday spirit a little bit, right? So early this week Samsung basically agreed to pay Apple roughly $550 million as part of this long-running patent dispute that they've had. Their patent disputes last longer than most relationships at this point.

Shen: Five years running.

Lewis: Yeah, which is insane. I mean I guess it's just a testament to how much they've dug their heels in and just fought each other on this.

Basically, this dates back to 2011. Apple said Samsung was using some of its patented technologies without permission. One of the ones that was cited in some of the examples was the pinch to zoom functionality in OS. Just to give you an idea of what this case centers on.

And so this $550 million seems like a big number. The reality is, it's a fraction of what the original sticker price that Apple was asking for was, which was like $2.5 billion.

Shen: Oh, wow.

Lewis: And courts had originally awarded Apple $1 billion. Samsung through a series of appeals and things like that, talked them down to this $550 million figure.

Shen: OK. Is this it? Is it over?

Lewis: No. That's the problem with this litigation process, right? It's never over. And, of course, in terms of like what does this mean for Apple, this is a drop in the bucket for their top line.

You know you look at the $200 billion plus that they made. This is nothing over the last year.

Shen: Yeah, of course.

Lewis: So I kind of wanted to bring it up because I think I'm hoping that it marks more the end of this like highly litigious six for these two companies. You know, you look back and like the 2010 to present really period, and it's just been brutal in terms of patent attacks.

And it's something that Steve Jobs was very adamant about was protecting tech and patenting pretty much everything. And I think that there's definitely something to be said for that, but I think that this might be the two companies, in addition to some of the other things they've done, turning the corner a little bit and hopefully burying the hatchet.

Actually, in 2014, the two agreed to drop their patent disputes outside the U.S. And so they had ongoing patent disputes in nine other countries at the time.

Shen: Oh, wow.

Lewis: Yeah, it's just insane when you think about the scope that this runs. And I think one of the crazier stats that I came across when I was researching this story was just in 2012, New York Times had this article and they mentioned last time, last year for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products according to public filings.

Shen: Which is insane.

Lewis: Just to give you an idea of how long this has been going on, how expensive it is for them to wage this battle in court against each other over such a long period of time. It's really big numbers.

Shen: I think some of this is just the maturation of people getting used to having this functionality on their phones and different devices. And so like if a feature's been around for so many years, at what point do you say like this is something that people are used to being able to do on their phones?

Lewis: Yeah there's definitely that element of it. So but I do think that both companies are tiring of it a little bit and maybe their mom called up and said, "You guys need to play nice so that I'll feed you guys over the holidays or something." But there's still some elements of this that need to pass through. So basically Samsung said once they received notice of invoice from Apple, they will pay it within 10 days. Samsung is of course requesting a Supreme Court review of the case so there is an appeal in there, but they are willing to pay the fine right now. And there is a clause written into this payment that Samsung would be refunded the money should the U.S. Patent and Trade office find that the patent should not have been issued in the first place. Which is something that has come up a couple times with some of these patents.

Shen: I've heard that the USPTO has some like internal investigations right now where they're evaluating where some of those early patents that they awarded to Apple might not, should not have been awarded in the first place. So this is kind of over.

Lewis: Yeah. There will probably be a follow-up at some point but I think more than anything else, this is just kind of more like the fascinating side of tech that you don't really hear about much. There's some really interesting stuff written about the patent process and kind of arming yourself with patents.

And I kind of urge our listeners to check that out if this is something you're interested in. They get into the process that some of these big tech companies use just because they have these huge legal resources. And some of it is just resubmitting and resubmitting and resubmitting it. It's like this war of attrition kind of against the U.S. Patent Office. And so that's where you start to see these "should these patents have been issued to begin with" type things.

But really fascinating stuff. I'm hoping that the two companies can just kind of let it go at this point and play nice.

Shen: That $550 million settlement -- I'm not saying it's a small amount of money by any means. To these companies, though, overall it is pretty much a drop in the bucket. But I think about it, I remember when these, when this legal battle first kicked off back in 2010, 2011, at the time when the Android -- Apple war was raging full on, I felt like this was almost like a symbolic perception of which company is leading the charge in terms of developments of smartphones. Like Apple basically claiming, "We started it all. Samsung's just copying us with their devices." But, honestly, at this point, five years later, there's a lot of good phones out there. I just don't think people care that much anymore.

Lewis: Yeah and I think you're totally right.

Shen: All right. Well, thanks a lot. That wraps things up for us, Fools. As always we love to hear from our listeners. So if you have any questions or comments, please email us at [email protected]. Again, that's [email protected]. And the people on this program may have interest in the stocks they talk about and The Motley Fool may also have formal recommendations for or against the stocks. So don't buy or sell based solely on what you hear. Thanks again for tuning in and Fool on!