Smartwatches are a dumb idea: numbers show the market is tiny: Peter Nowak

Destined to become low-priced tech junk.


Remember the LG smartwatch from a few years ago? Don’t worry, nobody does.

It’s funny to see news outlets continue to trumpet the impending arrival of smartwatches, a movement that will surely be led by Apple, as some sort of big deal. The latest on that front was Apple’s apparent move recently to trademark the term “iWatch” in Japan.

It’s equally funny that just about no one has stopped to take a realistic look as to whether such devices – which may indeed happen – will in fact be a big deal. The numbers suggest they will not.

In a post back in April, Natasha Lomas over at TechCrunch was as skeptical as I was. She referenced a report from analysts at ABI Research that figured the market for smartwatches would be about 1.2 million units this year. That’s about a third of the total number of netbooks that will ship in the same time frame – and netbooks are a dying category of electronics. It’s also about 25 times less than the number of iPhones Apple sells in a single quarter.

Back in March, some writers made an effort to get an idea of what the potential market might look like in dollars and margins. The conclusions there are that the watch business is big, generating about $60 billion a year, and that margins on them are good too, at about 60 per cent. Based on that, Apple could stand to generate more than $3 billion a year if it were to take just 10% share.

The figures miss a few points. For one, as a 2011 report from Global Industry Analysts noted, “Luxury watches remains the largest segment in the global watches market.” Luxury watches, according to the report, are those that retail for between $1,000 and $5,000. Even though Apple likes to position its products as premium, it’s extremely unlikely the company would venture into that territory with any sort of smartwatch. And even if it did, it’s highly unlikely it would sell. Luxury watch buyers pay thousands for their accessories because they’re prestigious status symbols and because they’re one of the few forms of jewelry that men do wear. Apple may have a hip and premium image, but it’s nowhere near the likes of Rolex or Omega. Smartwatches, if and probably when they do happen, are likely to be viewed as gadgets or toys, not the superbly precise instruments that luxury watches are.

That’s why estimates of Apple getting even 10% of that market are wildly inflated. Apple would have to sell millions of iWatches – not just a million – to get even a decent-sized chunk of the overall pie.

Then there’s the margin issue. The various Swiss watch makers have a huge advantage here for several reasons, the most important of which is that luxury positioning. They can charge more because the people who actually want their products are willing to pay big premiums for them. They therefore don’t compete on price.

If Samsung, Microsoft and every other tech company really is interested in having their own smartwatches, the field is going to get really crowded, really fast, at which point the same thing will happen as in tablets – the bottom will fall out of prices. Smartwatches are subject to Moore’s Law, whereas regular time pieces aren’t really, which means the technology behind them will continually get cheaper. That could mean the margins get fatter, but more likely it means that anyone will be able to get into the field. If Apple or anyone does get into the category and meets with any success, competition will get fierce quickly and the margins will shrink just as fast.

At the end of the day, the Swiss luxury makers will be left standing exactly where they were while smartwatches will just be another category of low-priced tech junk that some people were excited about once upon a time.