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THE WEARABLE COMPUTING MARKET REPORT: Growth Trends, Consumer Attitudes, And Why Smartwatches Will Dominate

Tony Danova
BIIWearablesForecast

BII


KEY POINTS

  • We estimate the global wearables market will grow at a compound annual rate of 35% over the next five years and hit 148 million units shipped in 2019. We have scaled back our original wearables market forecast from 2013 — which pegged shipments at over 300 million by 2018 — as a result of recent market performance and persistent barriers to adoption. 
  • The smartwatch will be the leading product category and take an increasingly large share of wearable shipments. We estimate smartwatch shipments will rise by a compound annual rate of 41% over the next five years.  Smartwatches will account for 59% of total wearable device shipments this year, and that share will expand to just over 70% of shipments by 2019. 
  • The Apple Watch will kick-start growth in the overall smartwatch market. The Apple Watch will account for 40% of smartwatch shipments in 2015 and reach a peak 48% share in 2017. It will be one of the most expensive smartwatches available, but the Apple brand will be enough for the device to ramp up quickly and achieve mass appeal.
  • Fitness bands and miscellaneous wearable device types, like smart eyewear, will continue to cater to niche audiences.
  • Now that both Apple and Google are in the smartwatch market, they will dominate, much as they have in the smartphone and tablet markets. Because these platforms make up nearly 97% of the entire mobile market, many mobile users interested in wearable devices will gravitate toward Apple Watches and Android Wear-based devices. 
  • Barriers still persist, and these will inhibit consumer wearables adoption and usage. Smartwatches in particular must become standalone computing devices with more robust functionality for the devices to become mainstream. This will require them to have an independent internet connection and smartwatch-native apps. Other barriers include small screen size, clunky style, limited battery life, and lack of a killer app ecosystem.

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WearablesTimeline

BI Intelligence


WEARABLES MARKET FORECAST UPDATE

We estimate the global wearables market will grow at a compound annual rate of 35% over the next five years, reaching 148 million units shipped annually in 2019, up from 33 million units shipped this year. (See chart, below, and at the beginning of this report.)

Wearables, in our definition, include fitness bands, smartwatches, and other assorted devices like Google Glass eyewear and smart clothing.

We find that the US will be the dominant region in the wearables market over the next few years. 

  • In 2014, we estimate that the US will account for roughly 80% of the global wearables market.
  • In the long run, however, the US will phase into the middle stages of the adoption curve, while early adopters in other regions will propel growth in their countries. The US share will fall to roughly 55% by 2019.

Wearables adoption in the US is actually following the same trajectory as tablet adoption in 2011, according to survey data from Nielsen

About 6% of US respondents said they already owned a wearable device, which is where tablets were in the first quarter of 2011 (the tablet category was launched by the first iPad, released in April 2010).

If following the same trajectory as tablets, 33% of US adult consumers would own a wearable device by the second quarter of 2017. 

Tablets and wearables have similar sales characteristics, so it makes sense to believe that wearables will see a similar adoption trajectory:

  • They are primarily an off-the-shelf purchase  not supported by subsidies.
  • They are also a complementary good to smartphones and PCs. Tablets and wearables do not replace the more essential smartphone, or even the PC. (Tablets were originally positioned as a PC-killer, but their limited computing capabilities make them poor productivity devices compared with the traditional desktop.) 
DeviceAdoption

BI Intelligence

Wearables, however, face unique obstacles that may lead them to have less of a market impact compared with tablets: 

  • For now, most of the devices need to connect with a smartphone or tablet for most of their functionality. Tablets offered independent connections to the internet through cell or Wi-Fi connections. 
  • Wearables also suffer from a perception problem. A lot of people don't really know why they might "need" a wearable, or how a wearable might really benefit them. We will discuss other barriers to adoption later in this report including price, lack of functionality, and style. 

These are the reasons why, despite being on a similar track thus far, the wearables market will not grow as large as the tablet market. In its first three years on the market, the tablet hit 212 million shipments worldwide. We forecast that wearables will achieve less than half of that over the same period, at roughly 108 million shipments. 

Among wearable device types, the smartwatch is the furthest along in overcoming these problems. While smartwatch apps are still limited and popular smartwatches still require tethering to a smartphone, the smartwatch at least fulfills the basic functions of a watch while adding enhanced features.

Smartwatches allow users to perform some tasks they do on their phones — look up directions, read notifications, send simple messages — without having to actually fish for their handsets or look at them. And they offer some of the exercise- and health-tracking benefits of fitness bands.

All along, we have been bullish on the wrist as the place where wearable devices will thrive. The smartwatch will be the device that drives most wearables growth, while fitness bands won't grow as fast as initially forecast, causing us to revise our overall wearables forecast downward. Fitness bands helped to introduce people to the idea of wearing a computing platform on the wrist, but they will be swept away by full-featured watches that can double as fitness devices. 

  • Consumers will ultimately be swayed by the smartwatch's increased functionality over the basic fitness band, and the smartwatch will siphon market share away from fitness bands.
  • The wider availability of cheaper and better smartwatch options down the line will also help to increase the smartwatch's share of the overall wearables market.

In keeping with the growing prominence of multifunctional wearable devices, like smartwatches, the components market for wearables sensors will also push up over the next five years. 

Several types of sensors are used in wearable devices, each with a specific use case. Because BII

WearableSensorsForecast

wearables are small, they typically require tailor-made sensors and can't simply be outfitted with sensors manufactured for handsets. 

  • Fitness bands typically carry only a couple of sensors. These include motion-tracking sensors like pedometers to track user movement. Health-related sensors are also prominent on fitness bands and are used for monitoring pulse and even skin temperature.
  • Smartwatches, on the other hand, have more complex user interfaces and hardware features, which require many more sensors than the average fitness band. In addition to the sensors found on fitness bands, they may contain many more. These may include special sensors to detect touch commands and sensors to translate voice commands into user input. 
  • We estimate that the average wearable device will house about three sensors by 2019. We arrived at this estimate by lining up our shipments numbers with market researchers' numbers on sensor shipments. For example, IHS expects sensor shipments to grow from 67 million in 2013 to over 466 million sensors shipped annually in 2019.  

It's important to keep in mind that this is an average. In reality, fitness bands will most likely still be defined by their minimal sensors — not more than two — while many smartwatches will have three or more sensors.

SMARTWATCH FORECAST

SmartwatchForecast

BII

The smartwatch will become the wearable device standard and will lead the market going forward.

  • Smartwatch shipments will grow at a compound annual rate of 41% over the next five years, which is just a bit faster than the growth of the wearables market at large. Annual smartwatch shipments will hit about 106 million in 2019, up from an estimated 15.6 million this year. 
  • Smartwatches' share of the larger wearables market will expand over the next few years. We estimate smartwatches will account for 59% of total wearable device shipments this year, and that share will expand to just over 70% by 2019. 

Smartwatches include devices like the Pebble, Samsung Galaxy Gear, the Moto 360, the LG G Watch, and the coming Apple Watch.

We anticipate that the Apple Watch — which is expected to debut in early 2015 and will be compatible with all iPhones going back to the iPhone 5 — will quickly become the market leader and take a big share of the market right out of the gate.

Apple's product will also make the smartwatch category as a whole more mainstream and appealing to consumers, even if they ultimately choose a (less-expensive) competitor, helping propel the smartwatch market as a whole going forward.

We forecast that Apple will ship roughly 15 million Apple Watch devices in 2015, its first year on the market. That is about as many total smartwatches we predict will ship this year. 

AppleWatchSmartwatch

BII

  • Apple Watch will account for 40% of all smartwatch shipments in 2015 and reach a peak 48% share in 2017. That share will fall to 45% in 2020, according to our estimates.
  • At $350, the Apple Watch's entry-level price tag will be higher than the prices for competing smartwatches currently on the market. In general, smartwatch average selling prices will decline over time as consumers choose less-expensive alternatives to Apple Watch. Thus, Apple Watch will remain among the most expensive smartwatch devices on the market.
  • Between 2015 and 2020, we estimate that annual Apple Watch shipments will grow at a compound annual rate of 30%, fueled by demand from luxury goods consumers globally and owners of the large-screen iPhone 6 and 6 Plus (and future iterations of the iPhone), for whom the Apple Watch will be a convenient companion device. Apple Watch shipments will hit about 53 million units in 2020. 
  • The Apple Watch's debut will kick-start smartwatch growth. We estimate the overall smartwatch market will grow 64% in 2015 and hit 36.5 million units shipped overall, compared with 134% growth this year. 

Despite the coming launch of the Apple Watch and the significant growth we anticipate over the next few years, it's important to remember that the smartwatch category is still in the very early stages of its life cycle. Samsung, Motorola, LG, and Pebble smartwatches are simple companion devices to smartphones.

Even the Apple Watch — which will not hit the market until early 2015 — will need to be tethered to an iPhone to conduct many key tasks like fitness tracking and messaging. The watch will not even have its own GPS chip. It will use location data from the iPhone to track steps. So runners would still need to keep their iPhone on them, along with their Apple Watch, to have their movements recorded.

Over time, we expect smartwatches to evolve from devices tethered to smartphones to fully connected, autonomous computing hubs. Voice commands will be able to drive more — and more complex — tasks. On top of smartwatch innovation, prices will drop over time, thanks primarily to an expected drop in the price of sensors. This will help move consumers away from basic fitness trackers and health monitors to smartwatches.

WHAT OUR SMARTWATCH SURVEY RESULTS SAY ABOUT ADOPTION

A smartphone survey we conducted among Business Insider readers during October 2014 illustrates how much consumer interest there is in smartwatches and what those consumers are looking for in the devices. 

SmartwatchSurveyResults

BI Intelligence

Even among the Business Insider reader demographic (which tends to be younger and more affluent than the general population), people do not seem very enthusiastic about the prospect of owning a smartwatch in the near future. 

  • Only one-fifth of smartphone buyers are interested in buying a smartwatch to pair with their phone: Of 1,678 respondents who said they planned to buy a new phone in the next six months, just 21% said they were also planning to purchase a smartwatch.
  • Prospective iPhone buyers were much more interested in a companion watch than likely Android purchasers. About 31% of those who said they would buy an iPhone in the next six months plan to buy a smartwatch, compared with just 12% of Android smartphone buyers.

Of course, the next six months is a relatively short timeframe, but the data shows that the smartwatch category still has a long way to go before it is seen as an essential consumer electronics device.

WhyBuyASmartwatch

BII

Those who say they are planning to buy a smartwatch pointed to a few specific use cases and reasons why they are interested in the device.

These are the top use cases: 

  • Reading notifications: 38% say that the most important benefit of the device is its ability to funnel phone notifications, information, and other content if users happen to be away from their smartphone.
  • Traditional watch owners wanting a smartwatch: Another 27% say that they already wear a watch and that the added functionality of a connected watch appeals to them.
  • Health and fitness: The 24% of respondents who chose "Other" were allowed to write in a specific reason why they planned to buy a smartwatch. Almost half of written responses pointed to fitness and/or health monitoring as an appealing reason to purchase the watch.

The number of people who wrote in the health- and exercise-tracking response suggests that fitness and health will continue to be a major driver of wrist-worn wearables adoption, and gives further credence to the idea that those who might otherwise opt for a fitness band will begin choosing a smartwatch instead. Also: The number of people who will buy a smartwatch for fitness-related reasons is likely to be much higher than the percentage who chose to write in that answer.

SMARTWATCH PRICING

As with any new technology about to hit the mainstream market, price is a huge factor in determining how the product performs.

Below is a list of the most prominent smartwatches currently on the market, as well as the Apple Watch's anticipated pricing. The table includes the smartwatch's starting retail price, the platform the smartwatch runs on, and the device's most notable features: 

Screen Shot 2014 10 21 at 1.22.41 PM

BI Intelligence

As you can see, many of these available smartwatches start in the $200 to $300 price range. This is the price most respondents to the Business Insider survey who were interested in buying a smartwatch said they would be willing to pay. 

HowMuchPaySmartwatch

BII

  • A plurality (32%) said they would pay somewhere between $200 and $300.
  • Another 31% said they would be willing to pay only $100 to $200. 

The Apple Watch stands out because it clocks in above the $300 threshold.

When it hits the market in 2015, it will retail for $350, making it among the most expensive smartwatches available.

  • Only 23% of respondents said they would pay more than $300 for a smartwatch. 

Still, the $350 price tag isn't that far afield. Given Apple's brand clout, and the fact that respondents were asked how much they would pay before Apple Watch actually went on sale (though after its price was announced), we think more than 23% of smartwatch consumers will still be willing to pay an extra $50 to get the Apple Watch. 

GOOGLE AND APPLE WILL DOMINATE SMARTWATCHES GOING FORWARD

SmartphonePlatformShare

BII

That both Apple and Google (through its Android Wear platform) have focused on smartwatches and not basic fitness wristbands will have a huge influence on the wearables market, and it is one of the biggest reasons we see smartwatches increasing their share of wearables shipments.

Apple Watch and devices running Android Wear carry all the capabilities of the FitBit and Jawbone Up fitness bands but with added features like messaging, navigation, and media.  

Apple and Google already dominate the mobile market at large. They combine for an astounding 97% of the smartphone market (see chart, right) and 60% of the tablet market.  

Their mobile influence will spread to the wearable device market and influence existing iPhone and Android smartphone users to stick within their mobile platform when they purchase a smartwatch. 

Samsung's decision to go with the open-source Tizen operating system on some of its Gear devices shows that competitors are hoping to keep the two companies from attaining the kind of control over smartwatches that they have managed to exert on the smartphone market. But those efforts will ultimately fail, as the overwhelming majority of users simply have too much invested in Android or iOS to choose another platform for their watches.  

THE FITNESS BAND MARKET

The fitness band is the wearable device that has been most accessible to the everyday consumer thus far, in terms of price and array of devices. But sales volume has been surprisingly low, especially given the number of devices on the market.

This, in tandem with our stance that the smartwatch will breakout as the leading wearable category, is what led us to scale back our forecast for fitness bands.

FitnessBandSales

BII

In May 2014, the NPD Group reported that only 3.3 million fitness bands had been sold in the US over the year between April 2013 and March 2014. While that number is quite low, the market is maintaining high growth.

  • Unit sales grew over 500% year-over-year between April 2013 and March 2014.
  • And that explosive triple-digit growth has actually been consistent for the past three years. We estimate fitness band sales growth at about 500% annually in the US for the past three years. That's impressive, but that rate of growth has not accelerated.

The growth figures are impressive — but deceiving. Growth is so high only because the market is at such a low base. For perspective, consider smartphone sales in the US. Motorola, which held only 4% of the US smartphone market among the top five handset makers in 2013, still managed to sell more than 4.8 million handsets for the year, according to estimates from NPD. 

In a sign that the fitness band isn't becoming a mainstream consumer device as fast as initially hoped, the Nike FuelBand, one of the most popular fitness bands, has recently turned away from manufacturing the actual device and is focusing primarily on its fitness-tracking app. 

While we anticipate that fitness band shipments will continue to rise at triple-digit rates, it will not be enough to help the fitness band category maintain its share of the wearable device market. By 2019, we expect global shipments of fitness bands to reach 30 million, for a 20% share of the wearables market, down from 36% this year.

GOOGLE GLASS


And where does Google Glass fit in?

The device that was hyped heavily in early 2013 and slated for an early 2014 market launch has come nowhere near reaching mainstream status. In fact, mounting evidence suggests Google may be moving away from the device as a major consumer-facing project. 

At major events, like the recent keynote at the 2014 Google I/O developer conference, the company made little to no mention of the device, or any developments concerning its app ecosystem.  

ConsumerComfort2

BII

For a significant period of time, Google kept the "Glass Explorer Edition" prototype limited to developers at an expensive $1,500 price tag. In May 2014, Google finally made the Glass Explorer Edition available to the public, but it didn't reduce the price, which has severely limited uptake. 

Google Glass has also come under fire for privacy and safety issues. 

  • Specifically, critics have spotlighted the lack of an indicator light when the device is recording or taking a picture. More than half of people in a YouGov survey said they would feel uncomfortable talking to someone who was using Google Glass. (see chart, above). Such widespread distrust of the device has kept adoption quite limited.
  • Google Glass has demonstrated benefits for enterprise uses. For example, HP has worked with clients in its commercial printing business to relay customer support and troubleshooting via Glass. However, certain professional settings like laboratories, research centers, intelligence agencies, and executive suites of public companies are sensitive about keeping information secret and would be unlikely to welcome eyewear that could be recording surroundings at all times.  

  • Google Glass is also distracting enough to wearers that there is also a potential public hazard around use while driving, biking, or even walking in congested cities. Glass wearers have already been ticketed for driving while wearing the device.
DVF Google Glass

Elle Video

  • Finally, Google Glass has been criticized for being far too conspicuous and odd-looking, much as the Bluetooth-powered smartphone headset was when it debuted in public. 

Google understands that adoption of Glass depends on whether people actually want to be seen wearing the device in public. Developments like the partnership with the high-end retailer Diane Von Furstenberg suggest Google hasn't totally given up on the device and is working to alleviate the style concerns.

But even if Google Glass uptake remains limited, it still represents an important device in the trajectory of wearables development. Google Glass has several unique characteristics that may be indicative of where wearables, especially eyewear, development is going: it uses augmented reality to represent information (images superimposed on reality) and has a robust voice command interface. It is also the rare connected device that is not a smartphone or a tablet but has a variety of apps that are truly unique to its ecosystem.

Glass should help pave the way for other autonomous wearable devices, especially smartwatches. 

BARRIERS TO WEARABLES ADOPTION PERSIST

The lack of a persuasive use case

Among the biggest barriers that could limit smartwatch adoption — and wearables adoption overall — is people still don't see the point of these devices.

This is the reason 51% of those uninterested in smartwatches gave us for why they wouldn't buy the device. At a distant second, 13% of respondents said they just didn't like wearing a watch. 

Until consumers see a clear reason why smartwatches will improve their lives, the smartwatch category will remain sluggish.

WhyNotBuyTheWatch

BII

In our earlier coverage of the wearables market, we discussed several related barriers that would inhibit this new device category from becoming a ubiquitous, mainstream computing platform.

Over a year later, several of these barriers continue to suppress wearable demand and are preventing consumers from really taking to these devices, including smartwatches. 

Lack Of A Killer App

We have long stood by the idea that killer apps would be the key to popularizing wearable device usage, and developers have yet to create a robust wearable app ecosystem for any smartwatch device.

There aren't enough apps out there that are really compelling on the wrist-worn devices.

Apple Watch

ABlogToWatch

Fragmentation is one of the biggest reasons for a lack of a robust wearable app ecosystem. Several wearable devices launched in the past year, and almost all of them used different platforms, making it difficult for developers to pinpoint a platform to build on. (See our full report on the wearable apps ecosystem.)

The Apple Watch SDK, which is set to come out in November, should propel more wearable-focused app development. 

But to create truly new use cases for wearables, the devices will need to move away from their dependence on smartphones and tablets. Because many wearables run solely on a Bluetooth BLE connection dependent on a companion device, many wearable apps still function simply as a link to smartphone and tablet apps — a way to receive notifications or record data without having to grab your phone.

For example, the first iteration of the Android Wear software development kit allowed Android developers to add code only to their existing apps to allow for app notifications on smartwatches. Beyond the Google Now digital assistant and some fitness tracking, Android Wear devices act primarily as notification hubs for third-party apps. 

Until the hardware improves, wearable apps will be limited in what they can do as a paired device dependent on the phone or tablet.

An early example of a truly innovative and independent app might be the Allthecooks Google Glass app that allows for hands-free cooking while recipe instructions are visible at eye-level. 

Limited Functionality

Basic fitness bands are limited to primarily tracking health- and fitness-related data and spitting this aggregated data back out onto a smartphone or tablet. 

And although we've pinpointed the smartwatch as the more elaborate wearable device compared with the fitness band, the biggest and most obvious limitation to the smartwatch is the small screen size.

These devices are clearly not made to handle content like games, video, photos, and even some social media — which are some of the most popular app categories on smartphones and tablets.

Moto360Text

Business Insider/ Lisa Eadicicco

The watch screen size also makes using the watch somewhat difficult with touch commands. To combat this, Apple has created the "digital crown."

The digital crown refers to the small knob on the side that on normal watches is used to wind the device or set the time but on the Apple Watch can be used for navigating the device. It serves as a kind of Home button for the Watch. Apple is calling it a "modern twist on a traditional feature."

But the digital crown is severely limited in what it can do (it can advance through a menu, select items, and return a user to the home screen). Smartwatches will require a wholly new interface approach (like voice) to offer anything close to the depth of feature a smartphone can. 

Style

Because many of the wearable devices mimic ubiquitous fashion accessories (watches, bracelets, glasses), one of the biggest concerns from consumers is the look and style of the device. A notable 7% of our Business Insider survey respondents said they found all smartwatches "ugly."

Consumers will most likely become more interested in wearable computing as the devices become more fashion-forward. A recent Nielsen survey found that 53% of consumers said they wished wearable devices looked more like jewelry. Nielsen surveyed more than 2,000 US adults. 

Thus far, smartwatches have looked somewhat clunky and unsophisticated, while smart eyewear like Google Glass is simply too conspicuous and obtrusive on the face. 

Apple Watch will cater to the high-end fashion crowd by offering premium versions of the device equipped with fashionable bands and even gold-plated watch faces.

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Apple

And as mentioned earlier, Diane Von Furstenberg has been tapped to improve the look of Google Glass. 

Style will be important if smartwatches and wearables are ever to extend beyond early adopters, but there is enough movement on this front that we expect the style issue to be overcome soon.

THE BOTTOM LINE

  • We estimate the global wearables market will grow at a compound rate of 35% over the next five years to hit 148 million units shipped annually in 2019. 
  • The smartwatch is the wearable device category to bet on. The Apple Watch will kick-start growth in the overall smartwatch market, but over the long run cheaper alternatives will surface. Consumers will be swayed by the Apple Watch and cheaper smartwatch alternatives, which will increase the smartwatch's share of the overall wearables market.
  • Other wearables, like fitness bands and Google Glass, will continue to cater to niche audiences. Fitness bands will continue to appeal to health- and fitness-oriented users, but mainstream users will ultimately prefer a more feature-loaded smartwatch. Google Glass is still an anomaly that has yet to hit the mainstream market. 
  • Price will be a significant factor to how smartwatches will perform with consumers over the next few years. Over time, we expect average smartwatch prices to drop, which will drive demand.
  • Now that both Apple and Google are in the market, they will dominate much as they have in the smartphone and tablet markets. Because these platforms make up nearly 97% of the entire mobile market, many mobile users interested in wearable devices will gravitate toward Apple Watch and Android Wear. 
  • Barriers we previously discussed still persist and are inhibiting consumers from embracing the wearable trend. These barriers include price, style, lack of a killer app ecosystem, and limited functionality. 



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