The Watch Market
The watch market today and its relationship to a possible Apple (NASDAQ:AAPL) iWatch strongly parallels the mobile phone market at the time of the first iPhone in 2007. In 2007, smartphones were in their infancy, but they did exist. In fact, the mobile phone market offered consumers a broad range of capabilities, from very basic voice communication, through what we would today call "feature phones" that offered limited text messaging or email, to what we would still consider "smartphones" by companies such as Nokia (NYSE:NOK) and BlackBerry (NASDAQ:BBRY).
Similarly, the electronic watch market offers a broad range of capabilities, from simple timekeeping, to sports watches with heart rate monitors and/or GPS (Garmin, Polar, New Balance, Suunto), which I would call "feature watches". Beyond feature watches, there is a growing number of smart watches, such as the Samsung (OTC:SSNLF) Galaxy Gear, the i'm Watch, and the Pebble. Many watches today have considerable smarts, just as many phones did back in 2007.
The deficiencies of today's feature/smart watches also parallel the deficiencies of feature/smartphones circa 2007:
1) Display screens are mostly small (1.5 inch diagonal) and low-resolution.
2) Navigation controls mostly rely on mechanical buttons (with notable exceptions).
3) Most of the feature watch class lacks an OS application architecture that allows users to download apps, or otherwise customize their watch. Smart watches based on Android, such as i'm Watch, or Pebble's FreeRTOS are the exceptions, of course.
iPhone's success derived in large part from the elegant way it addressed these deficiencies through the large multi-touch screen and an operating system derived from Mac OS X. I believe a similar opportunity awaits the iWatch if Apple simply runs the same game plan as the original iPhone.
Just as smartphones are gradually taking over the mobile handset market, smart watches have the potential to gradually take over the electronic watch market. That market isn't as huge as the mobile phone market, but it's still very substantial. According to Gartner, 1.8 billion mobile phones (including feature and smartphones) were sold worldwide in 2013. According to the Federation of the Swiss Watch Industry, 1.2 billion watches are sold annually (as of 12/2013), with 23% (276 million) being electronic.
Sifting Ground Rules
Sifting through the iWatch rumors is inherently more difficult than for the iPhone, because it's not a real product yet. While there's more than enough evidence to support an iWatch or wearable product of some type, when it might be released is an open question. For this article, I decided to simply assume that iWatch would be released late this year, probably October, in time for the Holidays. Filtering the iWatch rumors then becomes mostly a matter of deciding what is doable for a smart watch to be released at the end of the year.
Other than release date, there isn't much I feel I can assume about the iWatch, not even its name. In the U.S., Apple doesn't own the iWatch trademark, but I'll keep referring to it as iWatch, since it's what we're all used to. As usual, for a complete catalog of iWatch rumors, see MacRumors.
The Do-ability Test
Slap Bracelet iWatch with flexible display: Apple had submitted a patent for a wraparound "slap bracelet" combined with a flexible display that could be unwrapped and flattened. The patent application surfaced early last year, and immediately, everyone thought iWatch.
It's clear that Apple is very interested in flexible display technology for a number of applications where it might be useful to have some form of deployable display. Working prototypes of such displays, which can be rolled up or even folded, have been developed.
The displays are all based on some form of organic light-emitting diode (OLED). OLEDs can be applied to flexible plastic or glass sheets. Because they don't need a back light, the resulting structure can be very thin and flexible. In the not-too-distant future, people will be able to buy huge wall-sized displays that can be rolled up for transport.
In 2014, flexible displays are still experimental. The reason is that repeatedly flexing these displays can cause pixels to fail prematurely. OLED displays have problems with lifetime due to the fact that the chemicals used to produce the LEDs aren't as stable as semiconducting materials such as silicon. High current loads, as well as exposure to water molecules can cause the chemicals to break down and stop emitting light. Although OLED lifetime issues have been mostly solved for fixed displays, there's still work to be done to make flexible displays practical.
Doable by the end of 2014: No.
Curved AMOLED display: Active-matrix OLED displays have become common for many smartphones. Samsung uses AMOLED for the Galaxy Gear smart watch. Although flexible OLEDs aren't practical yet, they can be wrapped around curved surfaces that hold them rigidly. Last fall, Samsung debuted the Galaxy Round and LG the G Flex, both of which featured curved OLED displays. In the illustration below, I show an artist's conception of what an iWatch might look like with a curved display.
I consider a curved display essential for the iWatch to provide a generously sized screen, while not being ungainly. I look for the iWatch screen to be a little smaller than the size of the iPod Nano screen, 2.3 vs. 2.5-inch diagonal. I also expect it to have the same resolution of 240 x 432 pixels.
This will be Apple's first AMOLED screen. Although Apple has claimed that its IPS LCDs (for iPhone and iPad) offer superior image quality, iWatch needs a display technology that works well out of doors in bright sunlight. AMOLED displays have higher contrast, and that gives it an advantage over LCD.
The biggest advantage of AMOLED is that it can be used in a mode that greatly reduces power consumption by the display. Unlike LCD displays, only pixels that are "on" (emitting light) consume power in AMOLED. Thus, it's possible to operate the display in a low-power mode just by keeping most of the background black and displaying only white text or clock hands. In this way, the display can be "always on", unlike smart watches like the i'm Watch, which uses an LCD display that darkens quickly when not in use.
Doable by the end of 2014: Yes.
Battery life of 1-2 days: Battery life is the big challenge for iWatch. The AMOLED screen helps, since it's a little more efficient than LCD, especially in the low-power mode, but providing sufficient battery life is still a challenge. In terms of functionality and hardware, my conceptual iWatch is basically an iPod Nano. Like the Nano, the iWatch will have Bluetooth capability in order to communicate with the iPhone and display calls and messages, and provide some control and data capability back to the iPhone.
The problem is that Nano isn't even really an all-day device, as it stands, so Apple has to squeeze in an even bigger battery than what the Nano already packs. In order to maximize battery capacity while minimizing bulk, Apple will be forced to use the stratagem of the Nike Fuel Band, with batteries in the wrist straps. This will provide roughly a 50% increase in battery life compared to the Nano.
My biggest concern is that Apple may feel that 1-2 days of battery life isn't enough for an "incredible" and "amazing" device experience. Most of us charge our devices daily, so I don't really think this is a problem. Apple could make this more palatable by incorporating wireless charging.
Doable by the end of 2014: Yes.
Sapphire screen cover: Sapphire is commonly used for watch crystals. Watches, especially bulky sports watches, get bashed up a lot, and sapphire is a necessity. Since production volumes will be low to start, this is well within GTAT's production capacity.
Doable by the end of 2014: Yes.
Biometric sensors: From Apple's recent hiring, apparently biometric monitoring is seen as a killer app. I agree. I have a Suunto sports watch with a heart rate monitor, and it's great. The watch can record pulse rate profiles over the course of an hour run, and even plot the data on its tiny little watch face. The chest strap sensor is a little inconvenient, but it works.
Rumors suggest that Apple is looking at sensing technologies that can be integrated directly into the iWatch. Here, the time frame may prove to be a barrier. It's not clear that the sensors can be ready in time for an October release.
One option might be to put the sensors into the watch band, making the band a more important electronic component of the watch. Once again, this is analogous to the Nike Fuel Band, where electronics are distributed throughout the band. Bands might even be interchangeable, allowing different bands to be swapped out for different sensing purposes, such as glucose or heart rate monitoring. Interchangeable bands could provide opportunities for third-party solutions as well.
Doable by the end of 2014: Yes, but probably with external Bluetooth connected sensors at first.
Full iOS 8 capability: Here, we have to be a little careful about what is meant by "full iOS". The iWatch version of iOS 8 will necessarily have to be tailored to the hardware capabilities of the device, such as the small screen and limited battery life. Apple will need to create a separate version of iOS for iWatch, just as it has for iPhone and iPad. Apple will also need to create a separate class of iWatch apps as well.
That being said, you'll be able to sync your iWatch to iTunes as you would your other iOS devices, play music and videos, maybe even browse the internet or read an iBook. But iOS 8 will give iWatch other capabilities that the other iOS devices don't have, such as the ability to control iPhone in order to make calls, and send and receive text messages over iPhone.
iOS 8 will ensure that iWatch isn't merely an accessory to the iPhone, but a valuable stand-alone device even when you don't have your iPhone.
Doable by the end of 2014: Absolutely.
The iWatch Market
If the iWatch accomplishes the above list, I think its impact on the electronic watch market will be every bit as profound as the impact of the first iPhone. A recent Forbes article indicated that the smart watch market could grow from 5 million shipments in 2013 to 15 million in 2014.
Apple will be cautious initially, preferring not to overbuild a product with unknown sales potential. Sales of iWatch in the 4th quarter will be production-limited in the neighborhood of 3-5 million units. In other words, Apple will start this off as a "hobby".
By the end of the year, as developers flock to this new platform and as customer demand remains unsated, Apple will begin to realize it has another mega-hit on its hands.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.