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Qualcomm’s New Wear OS Chips Won't Reduce Its Dependence on Smartphones

By Leo Sun – Aug 13, 2018 at 10:45AM

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The chipmaker is finally upgrading its high-end smartwatch chip, but that probably won’t solve any long-term problems.

Two years ago Qualcomm (QCOM -1.33%) launched the Snapdragon Wear 2100, a custom SoC for smartwatches. That chipset replaced the Snapdragon 400-series SoCs that it previously sold to smartwatch makers.

Snapdragon 400-series SoCs were the same SoCs used in low-end smartphones, but the Wear 2100 SoCs were optimized for wearables, with a 30% reduction in size and a 25% increase in power efficiency. The 2100 also came in different flavors for "tethered" devices, which relied on smartphone connections, and "connected" ones with stand-alone wireless connections.

A woman checks her fitness progress on a smartwatch.

Image source: Getty Images.

Qualcomm claims that more than 100 devices and over 80% of Alphabet's (GOOG -2.74%) (GOOGL -2.44%) Wear OS (formerly known as Android Wear) watches now use Snapdragon Wear SoCs. That gives Qualcomm a firm foothold in the global smartwatch market, which could grow from 31.6 million shipments to 71.5 million shipments between 2017 and 2021 according to IDC.

Qualcomm subsequently launched the low-powered 1100 and 1200 chipsets for basic wearables and the 2500 chipset for low-end custom wearables for children. However, a proper high-end upgrade for the Wear 2100 remained absent for over two years.

Enter the Snapdragon Wear 3100

Qualcomm finally announced that it will reveal the Snapdragon Wear 3100, its successor to the Wear 2100, at an upcoming press event on Sept. 10. Qualcomm hasn't revealed the SoC's specs yet, but multiple reports indicate that the quad-core processor will use the same aging 28nm process as the 2100 and the same ARM Cortex-A7 architecture and Adreno 304 GPU.

This sounds like an odd "upgrade", but the 3100 will reportedly add a new power management IC codenamed "Blackghost" to improve its power efficiency, as well as new features designed for augmented reality headsets. So will these new chips move the needle for Qualcomm's chip business, which is trying to pivot away from mobile devices and into adjacent markets like wearables and Internet of Things (IoT) gadgets?

What's Qualcomm's game plan?

Qualcomm's claim that it controls over 80% of the Wear OS market isn't as impressive as it sounds. IDC expects Wear OS devices to control just 4.3% of the global wearables market (which includes basic fitness trackers, smart earbuds, and other devices) this year.

Meanwhile, market-leading devices like the Apple (AAPL -2.01%) Watch and Huami's Xiaomi Mi Bands don't use Qualcomm SoCs. Apple uses its own ARM-based S-series SoCs, and Xiaomi uses Dialog Semiconductor's low-power SoCs.

A woman checks her smartwatch.

Image source: Getty Images.

IDC expects Apple Watches to control 16.2% of the wearables market this year. Apple Watches appeal to iPhone owners -- many already view their smartphones as luxury devices, so buying a "luxury" smartwatch isn't such a big leap. Moreover, Apple focuses on extending many of its core services -- like Apple Music and Apple Pay -- to the Apple Watch, which makes the smartwatch feel like an organic extension of its ecosystem.

Android devices, however, often appeal to lower-end shoppers who aren't drawn to pricey smartwatches. The fragmentation of the Android market -- which includes many OEMs battling out over phones and watches -- also dilutes the brand appeal of many high-end Wear OS smartwatches.

On the bright side, IDC believes that Wear OS devices will still claim 9.8% of the global wearables market by 2022, compared to Apple's 17.3% share. It expects annual Wear OS shipments to rise from 5.4 million this year to 19.6 million by 2022.

Insignificant revenues

If Qualcomm still controls 80% of the Wear OS market in 2022, it could ship 15.7 million higher-end SoCs for Wear OS smartwatches that year. For comparison, IDC expects worldwide smartphone shipments to hit 1.68 billion in 2022.

Assuming that Qualcomm maintains its position as the world's largest mobile chipmaker (and retains control of about 40% of the application processor market), it would still sell over 40 times as many smartphone SoCs as high-end smartwatch SoCs in 2022.

Since Qualcomm's Snapdragon Wear SoCs likely cost less than its high-end Snapdragon SoCs for smartphones, it would also generate less revenue per smartwatch than smartphone. This means that it's doubtful that smartwatches will adequately diversify Qualcomm's mobile chip business away from smartphones.

But let's give Qualcomm a chance

It's easy to dismiss the Snapdragon Wear SoCs as an insignificant product line for Qualcomm. However, investors should also note that Qualcomm can still reach cheaper fitness trackers with other SoCs, like the 1100 and 1200, non-Wear OS Android smartwatches with lower-end chipsets. It could also target AR headsets with the 3100 and its successors.

If it expands its presence into those adjacent markets, it could become a major player in the wearables market. Therefore investors should reserve judgment on the 3100 until Qualcomm formally reveals the chipset next month.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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