Intel (NASDAQ:INTC) recently announced a cross-industry team-up with watchmaker Fossil (NASDAQ:FOSL) to develop more fashionable smart watches. Fossil will also work with the tech giant's investment arm, Intel Capital, to find co-investment opportunities and analyze market trends in wearables.

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Source: Fossil, Wikimedia Commons, author's edits

This could be a highly profitable partnership, since demand for wearables is expected to rise exponentially over the next few years. Research firm ON World recently forecast that global smart watch shipments will rise from 4 million units in 2013 to 330 million in 2018. Let's take a closer look at how this unique partnership could benefit both companies.

What this partnership means for Intel
Research firm IDC expects annual PC shipments -- Intel's core market -- to fall 6% between 2014 and 2017. Meanwhile, ARM Holdings (NASDAQ:ARMH), which dominates the smartphone and tablet markets, is expanding rapidly into the wearables market. Samsung's (NASDAQOTH:SSNLF) Galaxy Gear watches and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Glass are already powered by ARM-licensed chips.

That's why Intel has expanded so aggressively into wearable devices over the past year. The company unveiled Edison, a SD-card-sized computer that can connect everyday objects and appliances to the Internet, at CES 2014 in January. In March, it acquired fitness band maker Basis, which led to the recent launch of its Basis Peak smart watch. Last month, Intel announced a partnership with SMS Audio to create biometric earbuds. Earlier this month, it teased its $1,000 MICA wearable device, a luxury bracelet created with Opening Ceremony.

With the Fossil partnership, Intel can now expand into mainstream, mid-range watches as well.

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Intel's $1,000 MICA luxury bracelet

All of these strategies -- which give Intel a presence in fitness bands, smart watches, regular watches, and high-end jewelry -- should be considered fierce preemptive strikes against ARM.

What this partnership means for Fossil
Investors should note that this isn't Fossil's first tech partnership. Back in March, Fossil announced that it would work with Google on Android Wear devices, although it didn't disclose any other details. The partnership with Intel strongly suggests that Fossil's first smart watch will be an Intel-powered Android Wear device -- which would signal a major victory over ARM-licensed chips in wearable devices.

This also represents a major growth opportunity for Fossil, since most smart watch makers are currently tech companies -- like Samsung and LG -- instead of traditional watchmakers.

Fossil has an impressive portfolio of namesake and licensed products. The company makes licensed watches for Burberry, Michael Kors, Emporio Armani, Diesel, Marc Jacobs, Tory Burch, and others -- which gives it an impressive presence in the mid-range to high-end watch market. Therefore, Fossil's partnerships with Google and Intel could cause more of its licensed watches to evolve into smart watches.

What this partnership means for the smart watch market
Once Fossil makes its big push into wearables, it could seriously disrupt the smart watch market.

According to Strategy Analytics, Samsung dominated 71% of the global smart watch market in the first quarter of 2014, thanks to its wide range of devices. However, that market is facing an identity crisis. The low end of the market is filled with products like Samsung's Gear Fit which merge fitness bands with watches. In the mid-range market, there's a conflict between more traditional looking devices like Asus' ZenWatch and unapologetically digital ones like Samsung's Gear Neo 2.

Meanwhile, the high-end market (above $300) is uncharted territory, which will eventually be tested by upcoming products like Hewlett-Packard's Gilt smart watch and Apple's Watch.

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L to R: Samsung's Gear Fit ($150), Asus' ZenWatch ($260), and Apple's Watch ($350).

The average price of a fitness band or smart watch in the U.S. is around $189, according to NPD Group. Since Fossil's watches generally cost between $100 to $200, its core market is probably willing to spend the same amount on a Fossil-branded smart watch. If that happens, Fossil and its licensed brands could severely undermine efforts by HP, Asus, Motorola, and Apple to blend traditional watches with mobile technology.

In a recent analysis of the wearables market, Citigroup analysts noted that if Fossil captures just 6% of the smart watch market, which is comparable to its 6.3% share of the traditional watch market, it would generate over $500 million in annual revenue and add $1 to its earnings per share.

A Foolish final word
The Intel and Fossil partnership could lead to a convergence of two markets which had previously been considered separate. Whereas tech companies are leveraging their reputations in computers and mobile devices to sell smartphones as wearable peripherals, traditional watchmakers have the advantage of familiar form factors and brand loyalty.

If Fossil-designed, Intel-powered Android Wear devices hit the market, the public will start seeing smart watches as mainstream fashion accessories instead of geeky niche gadgets. That would definitely open the doors for a wide variety of stylish new smart watches and other fashion forward wearable devices to enter the market in the near future.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Fossil, Google (A shares), Google (C shares), and Intel. The Motley Fool owns shares of Google (A shares), Google (C shares), and Intel. 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.