The smart watch market is dominated by Samsung's (NASDAQOTH:SSNLF) Galaxy Gear brand, which accounted for 80% of all devices shipped in the first half of 2014, according to research firm Canalys. Samsung accomplished this feat by launching six smart watches at different price points over the past year.
Despite that growth, the smart watch market remains small -- Canalys reports that only two million smart watches were shipped in the first six months of 2014. However, global smart watch and fitness band shipments could surge from 4 million in 2013 to 330 million by 2018, according to research firm ON World.
Looking ahead, Apple (NASDAQ: AAPL) Watch could be the major catalyst that transforms smart watches from niche devices into mainstream ones. Analysts are optimistic about the Apple Watch's ability to outsell Samsung's devices, with shipment forecasts ranging from 10 million (Gene Munster, Piper Jaffray) to 60 million (Katy Huberty, Morgan Stanley).
Those are big numbers, but it doesn't mean that Apple Watches will marginalize Galaxy Gear devices. Let's take a look at why these devices shouldn't be considered direct competitors, and how the two rivals could actually be helping each other out.
Apple Watch has a starting price tag of $349, but units with fancier bands will likely cost a few hundred dollars more.
Samsung's Galaxy Gear devices cost between $100 (Gear Fit) and $300 (Gear 2). $300 is often considered the price ceiling for smart watches. ON World previously found that only 8% of 1,000 online respondents in the U.S. were willing to pay over $299 for a health-tracking smart watch.
That's why Apple and Samsung's devices don't compete directly against each other. Apple is promoting Apple Watch as a high-end luxury fashion accessory, while Samsung is trying to develop smart watches for a wider range of consumers. Apple faces less immediate competition, but Samsung faces plenty of competitors in the sub-$300 range, including Asus' ZenWatch, Motorola's Moto 360, FitBit's Surge, and Microsoft's (NASDAQ: MSFT) Band.
Apple's bet on the high-end market looks risky, but iPhone users tend to be more affluent than Android ones. A recent comScore study showed that the median iPhone user in the U.S. earned $85,000 per year, compared to the median Android user's annual income of $61,000. Since Apple Watch will be exclusive to the iPhone, Apple is betting that its same customers, who pay a premium price for its iPhones, will do the same for its watches.
Two walled gardens
Both Apple and Samsung corral their users inside walled gardens. Just as the Apple Watch is only compatible with iPhones, Galaxy Gear watches are only compatible with Galaxy handsets.
This strategy promotes brand loyalty by keeping user's activity tracking data and other information stored within their own ecosystems. For Apple, that platform is HealthKit, its unified platform for fitness apps, wearables, and electronic health records (EHRs). Samsung has S-Health, a similar Samsung-only platform which lacks HealthKit's widespread EHR support.
Apple and Samsung have the freedom to do build their own walled gardens, thanks to their large shares of the market. In the third quarter of 2014, Apple controlled 12% of the global smartphone market, compared to Samsung's 24%, according to IDC. Both brands also inspire loyalty -- a Morgan Stanley AlphaWise survey found that 90% of Apple customers and 77% of Samsung customers stick with the brand when buying new phones.
This separation of ecosystems means that the Apple Watch won't directly compete against Galaxy Gear watches for the same customers.
Apple and Samsung's smart watches might remain in their own worlds, but they can still help each other out.
Samsung boldly laid out the market foundation for smart watches, discovering what consumers liked (health-tracking features) and disliked (short battery life). This made it easier for Apple and other companies to design their own devices.
Meanwhile, Apple Watch has been a tech media darling since it was a mere twinkle in Tim Cook's eye. As the "early 2015" launch date for Apple Watch approaches, media coverage of the Apple Watch will likely intensify. When that happens, owners of Samsung phones might feel compelled to buy a smart watch of their own.
The upcoming battle for your wrist
Both Apple and Samsung need hit smart watches. For Apple, Apple Watch could offset declining iPad sales and diversify its top line away from iPhones, which generated over half of its revenue last year. For Samsung, Galaxy Gear watches help it expand beyond the smartphone market, where it has struggled against cheaper Chinese competitors like Xiaomi.
Looking ahead, many tech enthusiasts will pit the Apple Watch against the Galaxy Gear watches, but investors should remember that these devices are designed for very different customers.
Leo Sun owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. 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.