In this episode of Industry Focus: Tech, Dylan Lewis talks to Ramon T. Llamas from the International Data Corporation about the IDC's quarterly wearables data that came out last week. Listen in for a rundown of the major players in the space, and some major trends to watch in the industry.
A full transcript follows the video.
This podcast was recorded on May 20, 2016.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Friday's show, so we're talking tech, namely IDC wearables data, since the numbers are hot off the presses. I am your host, Dylan Lewis, and we're doing something kind of special today. I am joined on Skype by the research manager for wearables and mobile phones at International Data Corporation, Ramon T. Llamas. Ramon, how's it going?
Ramon Llamas: It's going pretty well. Thanks for having me here today.
Lewis: Yeah. Earlier this week you guys released the quarterly update to the market share data for wearables, right?
Llamas: Mm-hmm (affirmative). Always a lot of fun to put together.
Lewis: Oh, yeah. It's a lot of fun for us to digest. I have to say, this is a cool moment for me. When I reached out to your PR guys about possibly getting something going on a regular basis, I was not sure how enthusiastic you guys would be, but you said you were a big fan of the Fool. We're obviously a big fan of your research and the stuff you guys put out on a quarterly basis. It seems like a match made in heaven.
Llamas: Personally, I've been a fan of the Fool since 1995.
Lewis: You go way back.
Llamas: Yeah. Yes. Yes. I have all the books and everything.
Lewis: Wow! Yeah, that's the early Gardner stuff. Just to get started, you guys are the definitive source for a lot of the device shipment estimates that the market uses to get a broad stroke look at what's going on. Can you give some background on how you guys collect your data and what the methodology is there for our listeners?
Llamas: Sure. We take a number of approaches. Fortunately, because we've had a lot of expertise in gathering this kind of data in other device categories like mobile phones and PCs and tablets, we leverage a lot of these same relationships we have with these vendors to get insight as to how the previous quarter has been doing. In addition, we have a number of connections with channel checks, distributors, suppliers, component providers, that sort of thing, so we can better triangulate how different vendors are doing and how the overall market it shaping up in any given quarter.
Lewis: It sounds like if you get one number maybe from a manufacturer, you can gut check that against what the supplier might be telling you as well.
Llamas: That's exactly what we do. In addition to all these external checks that we have, we have a number of internal teams that say, listen, you may be getting this number, but I can tell you by my conversations with some of the other people in the ecosystem that the numbers may have to adjust slightly higher or slightly lower, but it gives us just another area, another defense card, if you will for us to say, "Here, we can gut check things one more time."
Lewis: Cool. Let's dive into the numbers that you guys came out with earlier this week. For the wearables market, and this is smartwatches, fitness wearables, anything in that spectrum, you guys estimate 19.7 million units in this just recently closed quarter. That's an increase of 67% from the 11.8 million units shipped during last year's first quarter. That's down sequentially 27.4 million, but no real surprises there, the holiday season's a big boom.
Llamas: Holiday season is a big boom. A lot of vendors were hoping that the fourth quarter of 2015 was going to be the time when, "Oh hey, look, a wearable, the greatest gift you can give during the holiday season." The first quarter of 2016, yes, we're expecting some retrenchment if you will. At the same time we saw a lot of activity.
You're seeing a number of companies being bought up. You're seeing a number of companies trying to realign and rerationalize their strategies. An inner portion we saw in several companies bow out of the market altogether. For a market that's just about four, maybe five years old, still a lot of activity going on here.
Lewis: Just a rundown of the top players in this space right now. Fitbit (NYSE:FIT) was in first place in market share. They had 4.8 million shipments according to you guys, good for 25% of the pie roughly. Xiaomi, the Chinese manufacturer was in second with 3.7 million and just under 20% of market share. Apple (NASDAQ:AAPL) in third, 1.5 million, but just under 8% of the market share.
Just a quick rundown of the things that really jump out to me at least; Fitbit's market share is down year over year and sequentially, and the year over year isn't terribly surprising because last year's first quarter Apple wasn't in the market yet. That's a natural chunk that's going to be taken right out. Is Xiaomi the culprit here with what we're seeing on a sequential basis? I see that their market share hasn't really flipped all that much, but they're up sequentially.
Llamas: Well, it's not so much the sequential growth that I'm really concerned about, because at that point we're really looking at the seasonality of the entire market. Going from a busy fourth quarter where everyone's giving these things as holiday gifts, down to first-quarter retrenchment, we're expecting that kind of activity. Whereas if you take a look of the year over year growth from a year ago, yes, Apple wasn't out during the first quarter of 2015, so we'll put those guys aside for a second.
Take a look at Fitbit, up 25% year over year. Xiaomi, up more than 40% year over year. Now we're talking about real growth opportunities, again, that's seasonality. It makes you say here's a number of different vendors, growing a number of different ways. No. 1: new devices. No. 2: new distribution channels. No.3: new markets that they're spreading into.
That's going to be the part that I tout the most saying, yeah, you can have a post-fourth-quarter slump, but altogether if we're seeing the market showing consistent year-over-year increases and look, we're doing it at a strong double-digit clip, that portends some good news for the foreseeable future.
Lewis: One of the things that I was really struck by was the others category. Outside of the top five in terms of market share, all the other manufacturers that come into play there. A year ago in 2015, they made up about a third of the market. They're actually up year over year up to 37%. It's not a huge move, but I was kind of expecting consolidation as this market matures. I guess it's not quite there yet. It's still very nascent, but any color there as to what's going on in that lumping of others?
Llamas: Here's the thing, with this other category, that encompasses a lot of different types of devices that have been coming out. It's easy to point to things like fitness trackers that go on your wrist or some sort of smartwatches. Now we're looking at a number of different products and form factors like smart shirts, smart workout shorts, smart socks for crying out loud. Smart jewelry, smart eyewear and head-mounted displays.
There are a number of different categories that are coming out en mass from a year ago. Yes, they're taking up more market share. At the same time we're seeing a lot of copycat-type vendors. For every Fitbit device that comes out, there's at least a couple hundred other copycats and me toos and wannabes that do exactly the same thing, it just doesn't say Fitbit on them.
We've got to give all these market contenders and followers and fast followers and pretenders to firmly establish themselves over the next several quarters or even years for that matter, to see where the market is truly going.
Lewis: That's part of the fun of tracking a nascent market, right, is seeing how it all shakes out?
Llamas: Exactly, because first of all, if we rewound the clock back let's just say an even 10 years, that puts us back to what, 2006, pre-iPhone and somebody says to you, hey, a decade from now we're going to have a brand-new market, we're going to have a brand-new vendors getting into it. Of course, my knee-jerk reaction would have been, yeah, maybe we'll see Apple and Microsoft and Google and all the usual suspects.
If you take a look at this top five list, there's some vendors over here as well as a host upon host of other vendor names here you never ever heard of, guaranteed. Because we're here in the U.S., you probably won't hear of them ever again, either. That certainly says the forces of this market and the power of local manufacturers and OEMs to get into this market as well.
Lewis: To your point, it's actually been kind of surprising the lack of success that some of the really big entrenched tech names have had. You look at what Samsung has done and they've been more or less flat in this market. You've had these upstarts or these kind of low-end manufacturers, your Xiaomis coming in and just taking huge swaths of the market.
Llamas: Exactly, exactly. With respect to Samsung, yeah, volumes change not too much from a year ago, but if you lift the hood and you say to yourself OK, how has the devices changed? How has their portfolio changed? You take a look at what they used to do in terms of experiments with different flavors of a watch and what different features work. Now they've got something much more robust and much more sophisticated and stylized. It's been a very popular watch with carriers because it has cellular connectivity.
Meanwhile, you've got a company as you pointed out, Xiaomi, great growth year over year. Guess what? The vast majority of that company's volumes are still ending up in China and these are fitness trackers that go for about between $12 and $15. Incredibly inexpensive. Sometimes they're bundled with a smartphone as well.
Again, you lift the hood and you take a look at number one, the products, but number two, take a look at that distribution strategy of how some of these devices made it out the door. Really interesting time to be in this market.
Lewis: Yeah, I'm glad you brought up Xiaomi and their efforts in China and how really that's the bulk of their business, 90-something percent of their business at this point, right? You guys take a global look with this data so all the market share numbers we're talking about here are worldwide. Are there regional markets where demand is particularly strong either for one brand like Xiaomi or just there's a huge appetite for this type of technology?
Llamas: It's really, it really comes down to three markets. One is China. Another one is the United States and the other one is Western Europe. If you grouped all the England, France, Italy, Germany, Spain and some of the smaller markets there, we're starting to see similar numbers at least on a top line basis. Now if you talk about the different brands over here, here in the U.S. we can talk about the Apples and the Samsungs, the Fitbits and the Garmins, no problem.
When I was taking a look at the Chinese list, just the top ten, I never heard of some of these vendors that are over here. Yes, you see your Xiaomis and your Huaweis, but things like Lifesense, XTC, Abardeen; things that you and I might not recognize, and even have a hard time trying to find on a Google search. This is what's happening there. OK? That kind of says to me there's space to move, there's space to grow, but I think a number of these markets we're starting to see challenges to the partition of global order. Why does the world have to belong to a Fitbit or an Apple or a Samsung? It could be done, it could be homegrown and in some cases a lot less expensively too.
Lewis: Is there anything looking back at this most recent quarter that really surprised you in the data or has it kind of been more of the same?
Llamas: A lot of people ask me, "So, what's going on with Apple?"
Lewis: Everyone wants to know. That's the biggest market cap company in the world. Google, they trade back and forth with Google I guess.
Llamas: True, true, but if you take a look at this top five list, do you see a single Android-ware vendor on it. The answer is no. Let's just fast forward to Apple and say OK, 1.5 million units. You take a look at that number and then you take a look at some of the comments that Tim Cook mentions on the earnings column. He says, "You know what? Apple Watch, it meets our expectations." I said, wow, meets you expectations.
Let me get this straight, if Apple watch meets expectations with 1.5 million units, and don't get me wrong, it's a lot of units compared relatively speaking to other vendors and devices out there. If you take a look at that and put it alongside the challenges and the other products, because we know that iPhone saw year over year decline. Tablets have been on a steady decline. PCs decline or almost flat.
With the watch, with Apple Watch, it's still not there yet in terms of volume or in terms of revenue to offset the declines of Apple's most popular products. That gets my attention quite a bit, especially if Cook is saying this is meeting expectations. That says to me a couple things. Number one, if it meets expectations, obviously that means expectations are low. Number two, the Apple Watch in its current form is not going to be the be-all, end-all. What I mean by that is I think in a couple of years we'll look back at this first iteration of the Apple Watch and say, "My, my, wasn't that a quaint little device."
More development is warranted and it's on the way. The third piece over here is that if you take a look at Apple as a whole, and I say to myself: "Where are all the investments being made?" Especially we always talk about things that happened under Steve Jobs' watch and now under Tim Cook's watch. What does this mean for Tim Cook's first device and what does that mean for future devices? Are expectations going to be unreasonably high, rationally lower or somewhere else in between? A lot of fun questions to ask about that.
Lewis: I will say bless you guys for giving the market some idea of what is going on in terms of shipments, because Apple has been notoriously opaque about providing anything in terms of volume. I can say, I'd like to speak for a lot of people by just thanking you guys for giving us a number to try to hang our hats on.
Llamas: No problem. Thanks very much.
Lewis: You talked about functionality a little bit and the idea of the current iteration of the Apple Watch being kind of a cute product compared to what we might be seeing down the road a couple years. Something that your team talks about quite a bit is the idea of bifurcation in the wearable space, and the market being segmented into these two different groups: these very robust smartwatches -- or what we think of as robust now -- and then these more bare bones fitness wearables. I've always been of the mind-set that that's not going to coexist forever, but it seems like it's still holding right now.
Llamas: It's exactly holding right now. I think that's a good way to think of it as two products that potentially compete against each other. For me right now I think they're necessary conditions in order to expand the overall wearables market. With these bare bones simple fitness wearables, there's a huge segment of the population that really just gets it. You can open up the box and slap it on their wrists or clip it onto their belts and say OK, I know what this does. It just tracks my steps. They can clock that. They can wrap their brains around that rather easily.
For the smartwatch market right now, a lot of questions as to what problems do these devices solve and why do I need it when I still have a smartphone that does just about everything that I need it to do? I think having growth in these two categories, that's great because we're going to be addressing two different market segments at the same time. People who just want simple and people who want a couple steps ahead.
I think if we fast forward the conversation a few years from now and we can take a look at this and say aha, how much legs does a fitness tracker have up against a smartwatch and vice versa, because at that point we can take a look at the different kinds of functionalities that can be incorporated into each, and what price points and what distribution that we're going to see from them both, in order to make it out to the market.
Lewis: Yeah, I think the lower price point wearables provide a nice entry point for people that think they might like wearables, they might want a fitness tracker, they might eventually want a smartwatch, but they want to try it out and see how long they'd really use it. You know you hear those industry horror stories of fitness bands just collecting dust in people's drawers after six months or something like that. The wonder with consumers about "is this something I'm really going to use." It is nice that there's that low level there. I do wonder if that will blend a little bit more in the future though.
Llamas: Here's the thing about this wearables market, also being a nascent market, is that where does change take place? Change takes place on the fringes. It doesn't take place right directly in the center. Where change is taking place the most right now and it has been for the past several years, is it has been with fitness trackers. People get it.
Now what do we see on the edge right now? It's the smartwatches. It seems like the natural evolution. It's going to take a while for these things to get into the center of the mass market and see widespreaded option. While at the same time we have great expectations for both smartwatches and fitness bands. Let's not overlook all the other product categories out there.
We snickered a little bit when we brought up smart clothing, but I think that's an area that's going to have tremendous growth potential. Same thing with smart eyewear and same thing with smart ear-ware. You can see things taking off from that point. Now we've got to step back and say "approximately how much of my wardrobe is going to be smart? Who's going to bring it to me, and am I going to like it? Am I going to want to pay for that price deferential between paying say $15 for a tee-shirt versus $40 hypothetically for a tee-shirt that tracks my vital health data?"
We haven't gotten to that point, but it's going to come. Expect it.
Lewis: A couple companies that are really playing in that space or looking to whose names are not currently in the market share conversation, at least looking at the top five, that I think of are the more traditional fitness companies, Under Armour (NYSE: UA) (NYSE: UA-C) and Nike; and so their efforts in smart tech I think are still very limited. They're kind of in their infancy. Do you think there's a point possibly in the not so distant future where we start to see their names coming onto this list?
Llamas: Here's the thing about big companies like Under Armour and Nike and just to toss out a couple more, New Balance, Reebok, Asics; considering that health and fitness as a category is the low hanging fruit for the wearables market, I whole-heartedly expect these vendors to get into the space and make a lot of noise. If you take a look at it the blueprints are already there for making apparel and clothing of all different kinds.
Now ask yourself what does it take for vendors to make say shoes and sneakers smart? I'll probably say not too much. Maybe a number of sensors, but I think it can be done. These companies already know how to make clothes, particularly clothes with compressure fabric, so you get a nice tight wrap around the body.
These companies know a thing or two about that. They also got a very strong brand with ardent followers. Look, just to show my local regional loyalty, Tom Brady who has a stake in Under Armour, comes out and says, "Hey, I got this shirt. It's smart. It will track all your statistics," you know how many New England Patriot fans like myself will probably line up and get those things?
Lewis: Ramon, we were getting along so well until you dropped the Tom Brady reference. I'm a Jets fan, so I have to take a little bit of an exception to that, but I'll let it slide.
Llamas: What if Darrelle Revis came out with a shirt like this?
Lewis: Yeah, I'd be on board. There you go. That's something we can agree on, because he played for both of us, right?
Llamas: Exactly, exactly. Here's the point, is that it's not going to be long till these vendors that we listed and along with many others, either number one, come out with something on their own, or number two, partner up with somebody to bring in all the electronic and technology smarts to be paired up with the apparel and expertise to bring out some form of athletic clothing and apparel that people are really going to want.
Lewis: Excellent. Ramon, before I let you go, I have to get some more forward looking stuff from you, just because I have you on the line. Every time I look at your data, and this is something we kind of alluded to a little bit earlier, I have to have in the back of my head that there's this lumpiness to some of these numbers, because it's a nascent market, because the calendar for product releases aren't maybe as standardized as you'd expect for smartphones, things like that. Are there going to be any things that look weird sequentially or year over year, or anything that we can kind of anticipate for the current sales quarter that will someone will grab a bunch of market share, but we should know that because they have a product coming out or anything like that?
Llamas: I think your question is so timely on multiple levels. Here's why, this week Google I/O 2016. They talked a lot about Android-ware and showing a lot of features and functionality over there. In a couple of weeks, Apple, with WorldWide Developer Conference, WWDC, they're going to be talking a lot about their road map. Chances are Apple watch will be getting some prominent placement over there as well.
Then if you take a look at some of the other announcements that we saw from the Consumer Electronics Show, CES, back in January in Las Vegas, and then more recently Mobile World Congress, or MWC in Barcelona back in March; a lot of those products that they were showing off at these tech shows, they'll really be coming out the middle of the year, Q3 time frame. Guess what? A lot of them look really pretty, a lot of them are incredibly functional. Some of them are iterative of what we've seen before, but I'm also going to bet that 2016 is also going to be the year that we're going to see some new features that we haven't seen in the past or not get enough recognition in the past finally start to bubble up to the market, so stay tuned.
Lewis: Anything in particular to keep out eyes peeled for on the feature set?
Llamas: I'm going to give you my two favorites, is that OK?
Lewis: Yeah, yeah.
Llamas: OK, so my No. 1 favorite, it's a smartwatch with cellular connectivity. Here's why, it's because up until this point virtually every wearable you put on your body has to go through your smartphone, right? For a lot of people, that is a non-starter. It's one of the classic responses of well, why do I need a wearable when I already have my smartphone? OK, fair enough. How about if we make your wearable connect to your cellular network, use the same phone number that you had before. Just don't have to clip to your smartphone all the time.
Lewis: You have an independent device there, right.
Llamas: Think about what that opens, Dylan. It's incredible, because now you're wearing a device and you can leave your smartphone at home or maybe it's lost or maybe it's sitting in your desk charging at home, charging or maybe you've just gone next door to the neighbor's or playing in the backyard with your kids. Now you're completely untethered. You can still get messages. You can still get phone calls if you need to. You can be Dick Tracey if you'd like to. All these applications that start up.
Say for instance that you and I go on a bike ride, and we come back after a good 20-mile bike ride and we're turning the corner, we're heading for home and my wearable is talking to my IoT-enabled house. It says OK, when I'm a quarter of a mile away, open the garage. When I'm this close turn on the lights or something like that. Why? Because my watch can tell, can ping the network saying Ramon is at this location and it's IFTT. If this, then that.
It just snowballs from there. We're going to see a lot of things in terms of the consumer experiences like that, in terms of oh gosh, shopping. Think of it this way. I'm a creature of habit. I go to the same stores all the time. What if I go to let's say my favorite liquor store, and instead of being in the usual area to get my favorite beer I'm in perhaps another area getting a different beer. Because I opt into all these fan sites saying that yeah, I want to be a follower of your brand, what if that brand sense Ramon is not in the usual spot looking at our stuff. Why not? Boom, they send me an instant coupon on my smartwatch.
Lewis: The hyper local advertising approach.
Llamas: Bingo! Bingo! That's crazy, but it's also a lot of fun. Also consider what this means for connected health. Instead of going to the doctor once a year and perhaps "lying" or bending the truth when the physician asks the question how you been feeling, well you can lie to him and say, "I'm feeling great," because I want to get out of here as quickly as possible. Or what if the doctor says, "You know what, Dylan? I got your data here that I've been tracking from your smartwatch. I see these times during the past six months your heart rate was elevated or your blood pressure was elevated, things like that. What's going on?"
Lewis: The sensors don't lie.
Llamas: Data doesn't lie. Sensors, I think that's another story entirely, but I think when you put it all together with cellular connectivity we can track. People know where they are, what they're doing and also how they're feeling. That's going to open up a lot of applications.
Lewis: Big possibilities. I'm looking forward to seeing how they pan out.
Llamas: Bring it on. Bring it on.
Lewis: Thank you so much for coming on the show, Ramon. I'm hoping that this is the first of many times that we're going to have you on Industry Focus. It's pretty great to have you.
Llamas: Me too. I had a lot of fun. Thanks for having me.
Lewis: Well listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out and say hey, shoot us an email at IndustryFocus@Fool.com. You can always tweet at us @MFIndustryFocus. If you're looking for more of our stuff subscribe on iTunes or check out the Fool's family of shows at Fool.com/podcast.
As always people on the podcast may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned. Don't buy or sell anything based solely on what you hear here. Thanks for listening and Fool on!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Dylan Lewis owns shares of Alphabet (A shares), Apple, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Apple, Nike, and Under Armour (A Shares). The Motley Fool owns shares of Under Armour (C Shares) and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.