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Is Samsung’s New Gear S2 Smartwatch an Apple Watch Killer?

By Jamal Carnette, CFA – Sep 8, 2015 at 8:00AM

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In a word, no. But Samsung remembered a critical detail most smartwatch vendors have omitted.

The Samsung Gear S2 family. The Gear S2 Classic (middle) has received rave reviews for its fashion-oriented design and appearance. Source: Samsung

When it comes to the nascent smartwatch industry, Apple's (AAPL 2.44%) newest product is dominating the market if the newest report from research firm IDC is correct. Although the company came in No. 2 in the second calendar quarter, losing out to Fitbit's 4.4 million unit-sold figure, IDC's data found that the company shipped 3.6 million units -- not bad for roughly two months of available shipments.

While Apple fans certainly wanted to finish first, they can take solace in the fact that the company controlled the subcategory of smart wearables by shipping two out of every three of the higher-priced, third-party app-compliant devices. Fitbit's fitness-focused trackers are classified as basic wearables, a category IDC thinks will lose market share in the next few years.

If there was one company that appears to be struggling in the wearables industry, it had to be Samsung (NASDAQOTH: SSNLF). While the overall market increased 223% on a year-on-year basis as a result of new entrants and growth among the existing participants, Samsung actually shipped fewer units than in Q2 2014, going from 800 thousand then to 600 thousand in the current quarter. But Samsung's recently announced Gear S2 smartwatch is looking to reverse that trend.

Welcome, Gear S2
At the IFA global trade show in Berlin, Samsung recently unveiled its newest Gear S2 smartwatch. Although the nomenclature denotes it's the second-generation unit, it could be thought of as actually third generation in terms of technology. After releasing the initial Galaxy Gear smartwatch in Berlin, as well, and receiving some criticism for the limited functionality of its Android-based operating system, the company moved to its own Tizen-based operating system in the follow-up Gear 2 unit it released in April.

The newer Gear S2 unit also incorporates the Tizen operating system, but builds upon a shortcoming in the Gear 2 unit: compatibility. Unlike the prior-gen unit, the new Gear S2 will allow compatibility with most Android-based smartphones with 1.5GB of RAM that are running Android version 4.4 (KitKat). But perhaps the best-selling feature of Samsung's new Gear S2 smartwatch is one that many smartwatch competitors seem to forget -- a watch is not only a functional product, it's also a fashion statement.

Give the fashionistas what they want
Although taste and style are highly personal and subjective, the Gear S2 smartwatch is a pleasant departure from the prior-generation units. First, the watch returns to a circular shape versus the blocky square design that the previous generation -- and the Apple Watch, as well -- employs. Wired Magazine, in an apparent hot-take, wrote "[t]he Gear S2 Classic may be the first great smartwatch." And while that seems presumptive, the key takeaway was Samsung focused on design aesthetic, where other vendors have treated this critical detail as an afterthought.

For Samsung, this appears to be a strong offering, but the smartwatch market cannot be thought of as direct competition. These watches are merely companion pieces -- as the decision about brand and ecosystem will probably be made at the time one buys the smartphone.

Apple Watch isn't a direct competitor per se; but these devices will have secondary effects of ecosystem lock-in. Samsung's Gear S2 has two functions: consolidate smartwatch market share among Android-based users, and slow the flow of Samsung smartphone users from defecting to Apple.

Jamal Carnette owns shares of Apple. The Motley Fool owns and recommends Apple. 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.

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