'Wearalone' Smartwatches Will Cannibalize 70% Of The Smartphone Market

With the smartphone market close to saturation, the mobile industry is searching for what comes next, and some already know what that is.


Considering that worldwide shipments of smartphones this year will exceed 1.4 billion units it might seem inconceivable that 70% of that volume will one day be replaced by anything – let alone shipments of wearalone smartwatches.

But this is the inescapable conclusion if we extrapolate existing technological trends. Remember that the modern smartphone market only started in 2003 and the iPhone and Android phones were launched in 2007 – just 7 years ago.

It is also worth remembering that the smartphone vendor landscape today is utterly unrecognisable to what was the case just seven years ago.

So we know that the entire mobile ecosystem can be undone and redone in less than a decade. And we should expect the undo-redo process to be repeated: while many things in tech are unclear, it is absolutely clear to me that the next 20 years will prove more disruptive than the last 20 years.

But, to be conservative, the claim here that 70% of worldwide smartphone sales will be cannibalized by wearalone smartwatches is based on a timeframe of 15 years (detailed below). But the handover could happen faster than that.

But first, what is a wearalone smartwatch?

A wearalone smartwatch can connect to the internet directly and does not need a companion smartphone.

Because a wearalone smartwatch contains the electronics needed to connect directly to a cellphone network it can have its own SIM card and associated mobile data plan:

Before we summarise the advantages and disadvantages of wearalone smartwatches, I want to look at the incremental value delivered by the smartwatch category as a whole - which falls mainly into the ‘convenience’ category.

This is important because:

Products that deliver major convenience benefits can catalyse a trillion dollar global industry

The convenience benefits that are relevant here are:

  • Better usability arising mainly from a different user interface;
  • Less time needed to perform common tasks;
  • Expanding the usage environment for existing behaviours.

Doesn’t sound like much of a big deal, does it?

But the value of convenience benefits like these should not be underestimated:

The main reason for the success of the entire mobile industry can be traced to massive convenience benefits: if we think about how mobile phones were perceived when they first arrived in the mid-1980s, then the concept of being able to make a call on an ‘anywhere, anytime’ basis – rather than having to wait until in close proximity to a fixed phone – was an utter revelation.

Even so, we should remember that not everyone was convinced about the market potential of mobile way back then: some thought that average users would never be willing to use a ‘brick-like’ portable telephone (those people did not understand how technology markets work). Other people thought that average users would never be willing to pay the higher prices for mobile calls (those people did not understand how market expansion results in costs, and therefore prices, falling). Incredibly, some people even thought that average users would find it annoying to be disturbed by constantly being called by others.

How wrong they were.

Early mobile phones did not enable a new type of behaviour – they instead just expanded the usage envelope of an existing behaviour. Rather than voice communications being limited by the coverage of the fixed line phone network, mobile meant that users could make and receive voice calls regardless of their location.

When written in this way, the convenience benefits offered by mobile do not seem like a very big deal – but they clearly were.

I can clearly remember sitting in design reviews in the early 1990s when we were arguing about whether mobile coverage would ever really be needed inside buildings. And in those same reviews, senior wireless engineers and radio network planners were complaining that they would never be able to achieve in-building coverage in dense urban environments.

Again, how wrong they were.

Hence, I feel that new devices – like smartwatches – which can dramatically increase the ease with which existing actions can be performed need to be considered very, very carefully.

Even these benefits might not seem like much when they are written down in a few paragraphs but the history of mobile shows that they can, in fact, catalyse a trillion dollar industry.

But there is one counter-argument to the case I’m trying to build here, and it goes like this:

You could argue that the mobile industry was kick-started based on a single, exceptionally powerful bearer service: voice communication. So fundamental and so basic is the human need to communicate that opening up the usage envelope to ‘anytime, anywhere’ was obviously – in hindsight – going to catalyse a massively successful global industry.

But in comparison, the advantages of wearalone smartwatches just aren’t in the same league: instead of a single, compelling bearer service, we see a kind of ‘smorgasbord’ of relatively minor benefits – like being able to speak a diary appointment into your wrist watch, or being able to ask what the population of Los Angeles is while driving.

I think that this argument has some validity but that, on balance, the value of the convenience benefits offered by a full implementation of wearalone smartwatches will eventually exceed that value offered by first generation cellphones.

The main reason for this is that we are still talking about a single bearer service, although it’s not voice. Today, the bearer service is access to the web, and all the millions of apps, services and features this implies.

Advantages

With a smartwatch and effective personal assistant, many routine smartphone functions can be accomplished without having to constantly reach or fumble for a smartphone.

But apart from being able to deliver all of these benefits, wearalone smartwatches will enable some genuinely new forms of behaviour. For instance, with further work in terms of native apps and compatible network services, it will be possible to buy products right at the moment when the user is aware they have a need (e.g. order more washing powder or order new toner cartridge etc.).

Because wearalone smartwatches will increase the number of functions that can be accomplished with a smartwatch, the overall value delivered by the smartwatch will increase. For example, the user will be able to more easily:

  • make and receive calls;
  • dictate emails and memos;
  • view streaming content;
  • ask questions;
  • search the web using interactive voice-based personal assistants.

But there are also other benefits, such as:

  • Easier to authenticate the user: it would presumably be possible to create sensors that respond to the user’s bio-patterns. This would reduce the need for the user to constantly enter their passcode;
     
  • More secure: there would be less likelihood of leaving your smartwatch behind on a train or in a restaurant. And because these devices would be harder to steal, users would benefit from lower insurance premiums. 

I'm not saying that wearalone smartwatches will obviate the need for a personal display device. Instead, I am saying that a lot of what we currently do using smartphones and even tablets could be accomplished equally effectively, or even more effectively, with a wearalone smartwatch.

Disadvantages

Putting to one side fundamental technical challenges, which relate to whether the vision of a fully-functioned smartwatch is possible at all (see below), the main disadvantage relates to the limitation of the small screen.

Compared with the large screens on most smartphones, and especially tablets, the small size of a smartwatch display is a definite limitation. Even if we assume that the smartwatch will evolve into more of a ‘wrist band’ format then it is still not clear that the user will want to spend a long time viewing a screen that is at an angle, or the need to constantly bend the arm would be uncomfortable. Even if these objections could be overcome, then there is still a question about how a user would react to viewing videos and pictures on a curved screen, rather than a flat screen.

And it seems hard to see how a fold-out flat screen could be implemented and whether it would be practical. 

While the limitation of the display is a significant negative, I continue to believe that the net value proposition will, in the end, be resoundingly positive and it is this net positive package of benefits that will allow the wearalone smartwatch category to reach a similar scale to today’s smartphone market.

Key Building Blocks

Creating a wearalone smartwatch that can catalyse a mass market will mean overcoming a number of critical technical challenges:

More space is needed for the required electronics

All smartwatches currently use the central ‘watch’ as the place to house the associated electronics and also the display.

So far, all vendors have ignored the wristband as a possible location for additional electronics, a larger more efficient RF antenna or a battery.

I think that as the capabilities of the constituent technological building blocks increase (see below) then vendors will begin to expand into the strap which will mean that the smartwatch will be closer to a ‘wrist band’ than a watch.

So far, the only tangible signs we have seen of vendors acknowledging this are some design concepts published by Samsung (patented in 2013) and Nokia (2012) that have variously showed a ‘wrap around’ phone / watch concepts:

Most recently, a report by The Verge revealed a 6-pin ‘hidden’ connection on the Apple Watch, which could be used to interface with sensors and/or electronics in compatible straps.

A ‘wrap-around and wearalone’ smartwatch would at least double and probably triple the amount of space for electronics and battery functions, which would be enough to fully implement the functions that current smartwatches have to ‘outsource’ to a tethered smartphone.

Here is a summary of some of the latest developments in the critical technologies that would be required to fully implement a wearalone smartwatch:

Flexible PCBs and electronics are on the way

This rapidly-developing segment includes at the one end relatively simple flexible circuit boards, to at the other end advanced lithographic techniques that can be used to deposit working electronic circuits upon flexible substrates:

Flexible displays are on the way

In 2012, Arizona State University reported the results of on-going work aimed at producing full-colour, full-motion flexible video and text display devices:

At CES 2013, Samsung Display announced a range of flexible display under the brand Yoam, based on OLED technology. This technology has since been used in Samsung’s Gear S smartwatch:

More recently, at an event in New York in November 2014, the company claimed it plans to be making between 30,000 and 40,000 flexible displays per month by the end of 2015 and noted that it has produced a display that was so flexible it could be folded in half:

Flexible batteries are on the way

A Californian start-up, Imprint Energy, is in the process of commercialising a flexible battery product that is aimed at wearable applications. The company claims that the zinc-based battery chemistry has a comparable power density to Li-Ion – which is the battery technology used in all mobile devices today:

More recently, in April 2015, researchers at Stanford announced the results of work aimed at producing a flexible battery based on aluminium and graphite.

While it is clear that these technologies are presently immature, this is mainly because R&D in the field of portable battery technology has been focused on hard battery formats – simply because the intended market application has been mobile phones and, to a lesser extent, power tools etc.

When global R&D activity starts shifting from hard battery formats to flexible battery formats, which will happen when the wearables market is more advanced, then the pace of development will increase rapidly.

Impact on the Smartphone Market

If we imagine a time in the future when the wearalone smartwatch concept outlined here is fully realised, then it seems clear that the result would be a major cannibalisation of smartphone sales – a market that is already close to saturation.

To quantify the impact in high level terms, I started with actual data for worldwide smartphone shipments from 2000 to 2014 and then added our forecast for how the size of the ‘advanced personal device’ market will increase through 2030.

If the smartphone as we know it today faced no competition from rival device formats, then the overall ‘advanced personal device’ market would increase in volume terms at about 1.1% annually after it reaches its saturation point – with the increase being mainly due to increasing population.

Based on where smartwatch vendors and the various enabling technologies are today, I have assumed that wearalone smartwatches will begin gaining significant market traction in 2016 when unit sales would be 3 million units. I then projected annual sales forwards using the actual historic rates of growth for the smartphone market as a template.

As we know the total volume in the ‘advanced personal device’ market we can infer what the impact on smartphone sales will be simply by subtracting wearalone smartwatches from the total.

The result is illustrated in the following chart:

The following table shows that the impact of wearalone smartwatches will be small in 2020, but will grow quickly thereafter – with wearalone smartwatches causing the worldwide smartphone market to contract by 70% by 2030:

Final Thoughts

Launched in September 2013, Samsung’s Tizen-based Gear S includes a cellular modem and SIM card and is so far the only serious attempt by a major smartwatch vendor at a wearalone smartwatch.

But based on where the various enabling technologies are today and how they are developing, I am certain that we are going to see more wearalone smartwatch products launching in the coming years.

I think it is very likely that Apple is at an advanced stage in formulating a plan for its own ‘wearalone’ smartwatch. There are at least two good reasons why Apple is likely to be thinking already about a radically different implementation of a smartwatch than the company’s current Apple Watch offer:

Competitive rivalry: Samsung is under extreme commercial pressure to develop product concepts that can deposition Apple and also compensate for the revenue slow-down the company is experiencing now that its core smartphone business has reached its peak. If Samsung is successful with its wearalone smartwatch then other vendors will introduce rival products and, eventually, Apple will be forced to introduce a wearalone product as well.

Market segmentation: In its effort to create the smartwatch market, Apple has assumed that users will mainly perceive a smartwatch as a watch and that, therefore, smartwatches should look like watches.

Apple’s working assumption that the smartwatch is mainly a new kind of watch has allowed the company to develop a very clever pricing strategy for the Apple Watch which perfectly matches the extreme asymmetry which characterises the wider watch market (see: The Pricing Strategy for Apple Watch Is Insanely Smart). 

While the marketing simplicity of this cannot be denied, it does raise some rather strange questions – including under what, if any, circumstances the user would want to wear a ‘real’ watch (say a luxury model) on one wrist and an Apple Watch on the other wrist? Both devices are clearly being marketed as watches but one is actually a watch, while the other is an advanced computer that looks like a watch.

To me, this one question suggests that something is wrong with the way Apple perceives the smartwatch market. I am not saying that Apple is wrong – just that, in time, we may see the company introduce a smartwatch that looks nothing like the current Apple Watch and more like a wrist-mounted computer. The company is probably calculating - wisely - that the market is not yet ready for this step, but that does not mean that it never will be.

Ultimately, I see the smartwatch market being segmented: some smartwatches will look like watches but incorporate a few smart functions while others will look nothing like a watch but incorporate full smart functionality.

A reasonable set of assumptions based on known historic patterns and existing technology trends suggest that wearalone smartwatches will cannibalise 70% of the worldwide smartphone sales by 2030, up from just 4% in 2020 and 0% in 2015.