Microsoft's Smartwatch: First Impressions Can Be Deceiving

Microsoft (MSFT -0.88%) just announced that it is developing a smartwatch that can monitor a user's heart rate with a battery that lasts for up to two days. The watch will be compatible with Windows Phone, Apple (AAPL 0.01%) iOS, and Google (GOOG 0.35%) Android devices, and it will move the screen to the inside of the wrist for privacy.

Source: Wikimedia Commons.

Microsoft's announcement wasn't surprising, considering that research firm Canalys expects global shipments of fitness bands and smartwatches to rise from 8 million in 2014 to 45 million by 2017. However, Microsoft's plan is considerably less ambitious than Samsung (NASDAQOTH: SSNLF) and Apple's.

Samsung recently unveiled Simband, a modular reference design that can be customized with third-party sensors. Apple revealed its iOS 8 Health App, which pulls data from various medical apps and devices onto a single dashboard. Simply put, Samsung wants to take over the hardware market, while Apple wants to conquer the software one. Microsoft's release of a single smartwatch seems timid by comparison -- but first impressions can be deceiving.

Is this actually a pre-emptive strike against Google?
Many investors might assume Microsoft's smartwatch is just a knee-jerk reaction to Samsung and Apple's recent announcements. However, it can also be considered a pre-emptive strike against Google, which unveiled Android Wear, a modified version of Android for smartwatches, in March.

Google is trying to take over the smartwatch market in the same way it claimed 78% of the global smartphone market in 2013 -- by releasing a free, open-source OS with a shared app ecosystem to a fragmented market of hardware manufacturers.

However, even Google's staunchest allies are uncomfortable with that thought. Samsung notably replaced Android with its own open-source OS, Tizen. Samsung also recently updated the first Galaxy Gear, which originally ran on Android, to Tizen.

Two most common complaints about the Galaxy Gear smartwatch are its dependence on Samsung's own Galaxy smartphones and its high price tag (up to $300). Microsoft has already addressed the first problem with compatibility across all three major mobile platforms. If Microsoft can launch its smartwatch at a lower price point, it could become a serious threat to the Galaxy Gear.

Filling in three big gaps
Releasing a smartwatch of its own could also help Microsoft fill in the gaps in three crucial areas -- Windows Phone, Bing, and HealthVault.

A Microsoft smartwatch could immediately address a common complaint about its Windows Phones -- its lack of compatible fitness bands. Fitbit, the leading fitness band with a 68% market share, is the only one of the top three fitness bands (Fitbit, Jawbone, and Nike) to offer an official Windows Phone app. Jawbone offers iOS and Android apps, while Nike's FuelBand has always been an iOS exclusive. Most other fitness band manufacturers tend to overlook Windows Phone entirely, since the OS still accounts for less than 4% of all smartphones worldwide.

Smartwatch connectivity could also make Microsoft's Bing Health & Fitness App, which launched in February, much more useful. In its current form, the app offers workouts, diet trackers, and symptom checkers, but it would benefit much more from real-time health data collected on a regular basis.

Getting a hold on users' wrists could also help HealthVault, Microsoft's electronic health records (EHR) service, gain more users. In the past, Microsoft tried to elevate HealthVault's profile by connecting it to the Kinect as a telehealth device and integrating it with Windows 8 EHR apps. However, neither approach convinced everyday consumers to store their personal health data in the cloud. If Microsoft's smartwatch catches on across all three mobile operating systems, it could finally help HealthVault connect with users beyond Windows and Windows Phone.

The Foolish takeaway
Microsoft CEO Satya Nadella seems to have ditched the company's "Windows First" mantra, which led to disasters like the Zune and Kin in the past. Nadella is comfortable selling Office on the iPad and smartwatches to iOS and Android users -- embracing bold strategies that I think his predecessor, Steve Ballmer, would never have followed through on.

Launching a smartwatch is risky, but if Microsoft offers the right features and the right price, it could have a cross-platform hit on its hands. If that happens, retail outlets like Verizon and AT&T might be willing to bundle Microsoft's smartwatch with any smartphone. That, in turn, could help the company glue Windows Phone, Bing, and HealthVault together into a cohesive cloud-based system and finally solidify the company's health care business.