Samsung (NASDAQOTH: SSNLF) recently teased its latest smartwatch, the Gear S2, which will directly compete against the Apple (AAPL 0.31%) Watch. A short teaser video showcases optimized weather, time zone, stopwatch, and ftiness tracking apps, while the device appears to sport a round face, a metal band, and a heart-rate monitor.
Samsung's Gear S2. Source: Samsung.
Samsung didn't disclose any specifications or the launch date, but it stated that it will reveal more details at its IFA press conference in early September. Will Samsung's latest attempt to claim the smartwatch market pay off, or will the Apple Watch keep stealing the show?
Why Samsung needs wearables
Samsung was the top smartwatch maker last year, with 1.2 million shipments, according to research firm Smartwatch Group. However, its market share fell from 34% in 2013 to 23% in 2014, because of the arrival of more competitors. The firm claims that 89 companies sold smartwatches last year.
Samsung's smartwatch strategy is similar to its one with smartphones -- to launch as many different models as possible to reach the maximum number of users. Samsung has launched six Gear smartwatches since September 2013, including the core Gear series, the fitness-oriented Gear Fit, and the 3G-enabled Gear S.
4 of Samsung's Gear devices. Source: Samsung.
Samsung is investing in smartwatches to diversify away from its smartphones, which are being crushed between Apple in the premium market and cheaper Android rivals in the lower-end one. That pressure caused Samsung's global market share to fall from 26.2% to 21.9% between the second quarters of 2014 and 2015, according to Gartner. That decline caused revenue at its IT and mobile communications division, which accounts for over half of its top line, to slide more than 8% annually last quarter. The unit's operating profit fell nearly 40%.
Understanding the smartwatch market
Research firm Canalys expects annual smartwatch shipments to rise from 8 million last year to 23 million this year, and then nearly double to 45 million by 2017. That might sound impressive, but we should remember that 1.2 billion smartphones were sold worldwide last year, according to Gartner. This means that despite its growth potential, the smartwatch market will probably remain significantly smaller than the smartphone one.
This also means that tech companies banking on smartwatch sales to offset weak smartphone sales could be disappointed, and the market could be commoditized by a rising number of competitors. KGI Research expects Apple to ship nearly 15 million smartwatches this year, which would turn Samsung from a market leader into a minor competitor.
Apple Watch. Source: Apple.
Yet pitting the Gear S2 against the Apple Watch is really an apples-to-oranges comparison. The Gear S2, if it runs on Samsung's Tizen OS, will be compatible only with Samsung's own mobile devices. If it runs on Android Wear, it will work only with other Android devices. The Apple Watch is compatible only with iPhones.
Therefore, the future of Samsung's smartwatches won't depend on comparisons against the Apple Watch. Instead, it depends on sales of Samsung's phones, the growth of Samsung's digital ecosystem (Samsung Pay, S Health, Tizen), and its ability to fend off Android Wear rivals that are compatible with Samsung phones.
Familiar challenges
Samsung's challenges in smartwatches mirror its struggle in smartphones. Apple remains well protected from Samsung's Gear devices and Android Wear challengers, thanks to its closed hardware and software ecosystem. The only real threat to Apple Watch is iOS compatibility for Android Wear, which isn't available yet. Samsung, however, doesn't have comparable competitive barriers.
With the Gear S2, Samsung appears to be imitating the round designs and steel frames of the Moto 360 and other Android Wear devices. Its rounded icons also bear a strong resemblance to those found on the Apple Watch's Home Screen. Unless the Gear S2 offers something unique that those devices don't already offer, it probably won't stand out in the crowded smartwatch market.
One piece of the puzzle
I'm not convinced that the Gear S2 will make any more impact on the smartwatch market than the Gear S, which launched last August to mixed reviews. However, smartwatches represent just one of Samsung's strategies to diversify away from smartphones.
Samsung has been beefing up its component manufacturing operations, which could help it challenge Taiwan Semiconductor's foundry business. It's expanding into virtual reality with smartphone-powered headsets such as the Gear VR. It also hopes that its smart TVs and appliances will give it a foothold in the fledgling smart-home market, and it recently unveiled tiny computing boards for Internet of Things devices.
The key to Samsung's continued growth its to ensure that these businesses grow as its mobile one fades. Whether its smartwatches can grow independently as phone sales decline is unclear, but they represent an interesting growth opportunity for the company.
