As a consumer packaged goods (CPG) specialist, I've expanded my analytics into the realm of wearables. Although more frequently associated with electronic goods, wearables are very much a form of CPG products. Even as the chest strap-worn fitness trackers have been repackaged and repurposed for wrist-worn devices, the evolution of the fitness tracker continues to find new form factors such as ear buds, hats, shoes and even belts (Samsung Welt, smart belt photograph below) .Some wearables are smarter than others, even with respect to their namesake like the smart belt, water bottle or smartwatch.
With all these differentiated form factors for fitness trackers and smart devices, the wearables category has become very crowded and very likely close to a saturation point in more mature markets. If the "smart" Welt by Samsung, which I sampled at the Consumer Electronics Show earlier this year, doesn't seem ridiculous enough, I would expect even more ridiculousness from the wearables category to surface in the future.
The Welt may seem like a stretch to the imagination… get it? But is it really that far a stretch when we consider what smart devices are proposed to do for the evolution of smart devices like the all-important and revolutionary smartphone? Some are of the opinion that a smartwatch is the next evolutionary step to the smartphone. I beg to differ with that opinion and completely disagree with the opinion that the smartwatch will disrupt the smartphone. This article aims to further explain why the potential of the smartwatch is quite limited and will never be able to disrupt the smartphone. The first article in this series titled "Apple Watch Will Not Disrupt iPhone... Ever" explored and explained the photography limitations of the smartwatch as a contributing factor to limited smartwatch sales. Having said that, there are still those who believe and articulate that the smartwatch will disrupt the smartphone.
The Apple Watch is not going to disrupt the smartphone by Apple (NASDAQ:AAPL) or any hardware provider. The smartwatch does not have the ability to address key concerns surrounding form factor and overall functionality.
Most obviously and most simply put, smartwatches are, have been and will continue to find underperformance because they can't overcome the physical action of taking a photograph. Samsung tried to incorporate a camera into its former smartwatches and failed miserably. But you can purchase refurbished Gear's from Best Buy if you like. It's one of the reasons they took it out of the advanced Neo smartwatch and don't include it in recent versions. It's one of the reasons its smartwatch business is in decline only two years post its original launch. It's the top three reason smartwatches get returned or never find a purchase from the inquiring consumer. It's the No. 2 reason retailers offer consumers aren't purchasing smartwatches as gathered in surveys conducted by Capital Ladder Advisory Group. But it's the No. 1 aspect that nobody has cared to discuss more broadly as reason for the poor sell-through results in the category that will impact the category and IDC estimates long term. By the way, IDC has never openly recognized the lack of camera functionality on smartwatches, not ever.
As one can plainly see from the excerpt noted, a smartwatch lacks the form factor benefits for photography that are intrinsic to the smartphone. This is not something a watch, smart or otherwise, can overcome. It's an aspect of human anatomy and physiology that becomes the impediment to success or disruptor status for smartwatches. Although no analyst has offered any commentary on this aspect of the smartwatch, it is a clear impediment to sales for smartwatches, which are met with YOY sell-through declines that are quite dramatic. Since articulating this specific issue regarding smartwatches in the way of analyzing its potential, there has not been the ability to negate the analysis. It is with that in mind that I aim to deliver the second biggest impediment for smartwatches to achieve disruptor status of the smartphone.
Frankly speaking there really isn't any in between with such a device. You either displace or you become displaced. Some people are of the belief that a disruption to the smartphone by the smartwatch will be akin to the disruption of the PC by laptops and tablets and smartphones. Simply put, the PC was not mobile and was disrupted by the invent of mobility. The smartwatch is trying to replace a mobile phone with a mobile watch. In the world of "are you serious" that is exactly what the smartwatch aims to accomplish or so some have offered. Mobile vs. mobile is a 1 for 1 game and the end result when pitted against each other for similar if not same technologies will need to eliminate the other. Again, there is really no room for an in-between result. They are trying to serve the exact same purpose and within using the exact same technologies. But the smartwatch isn't able to utilize the same functionality of the smartphone. The problem with the smartwatch is that it likely will never be able to combat human anatomy and physiology and the longstanding habits that have centered on cellphones over the last 20 years. Smaller is not always better or efficient and smaller has its limitations as smartwatches have and continue to find. How much dexterity do you have with a smartwatch versus your smartphone?
Most recently it has been recognized that Qualcomm (NASDAQ:QCOM) has developed chips for a phonewatch, not a smartwatch but a phonewatch from LG named Urbane 2. It seems very much that the so-called smartwatch needs to be walked back to identify what these smart devices might be best utilized for and that is telecommunications and not all the smart applications we've come to know and love about our smartphones.
As such and without any rational argument to the contrary, a smartwatch will always be limited when compared to a smartphone. This leaves the smartwatch to benefit from greater applications associated with phone communications and not all the major reasons we use smartphones today. But even as a phonewatch the question of "why still would I do that" begs to be asked. Even though we don't necessarily have to type our text messages out anymore thanks to Siri and other software, how often do you really see anybody talk-texting in public? I think we can safely say we see far more people texting than talk-texting. It's just not a user-friendly feature and it doesn't offer as much privacy to the smartphone user as texting. It's a case of a great idea, poor in practice. We are deep down the rabbit hole now with this smartwatch device, are we not? We've gone from a smartwatch that can't take photos, and no argument can be put forth to the contrary, to a phonewatch. It gets worse folks, trust me it gets a lot worse.
As I demonstrated with absolute logic and clarity as to why smartwatch sales have paled in comparison to smartphones, even post generation 1 products, we have to continue to understand why we use smartphones. When we analyze why and with great frequency we use certain functions on the smartphone we come to realize a watch simply can't offer that same functionality largely due to form factor. That is something that the watch can't overcome. Usage will determine demand - it always does. The consumer has, is and will continue to make the choice of smartphones regardless of smartwatches becoming untethered and based on greatest usage features.
So here is the next feature that is most advantaged by smartphone users, gaming. And of course, nobody in the world of analytics or product development has put forth such a notion of mobile gaming and how absolutely ridiculous such an application is or would be on the smartwatch. Nobody wants to point out the obvious limitation for such functionality with the smartwatch because they are in the business of selling goods or a positive story. Negative reviews and negative critiques don't find favor and as such nobody wants to discuss how poorly conceived the smartwatch has been. One-handed, sorry, one finger gaming is what the smartwatch mobile gaming application would call for and that is simply an impossibility. In no way shape or form do the software developers want to lose their revenue stream to a device that simply won't benefit the function of mobile gaming. Dexterity is a must for mobile gamers and a wrist-worn smart device doesn't compute that way. Mobile gaming is expected to surpass and may have already surpassed console sales.
Games generated approximately 85 percent of mobile app market revenue in 2015, representing a total of $34.8 billion across the globe, according to a report on the app economy by market researcher.
I doubt very much this revenue stream will be allowed to dry up due to the theory of "smaller is where we are heading" as put forth by others. It's not going to happen and Apple constitutes one of those operating systems that benefits from mobile gaming app downloads. Brick wall after brick wall after brick wall for the smartwatch. Excuse me, phonewatch. Sales for smartwatch devices tell the average investor and reader there's something fundamentally wrong with this product from a conceptual standpoint. Walking back the notion of becoming something that could possibly disrupt the smartphone the way the laptop and tablet disrupted the PC asks the average person to accept they will no longer be able to use their smart device as they had before. That's not what happened with mobile computing, now is it? Mobile computing allowed greater usage of the former and present PC.
All anybody has to do is walk into his or her local smartwatch retailer and ask about the product. One of the first things the sales associate has been trained to ask the customer is what do you do for work or what do you primarily use your phone for. Ever heard the sales associate ask those questions for inquiries concerning the purchase of a smartphone? That's how limited smartwatches are from a functional standpoint. Try to point and click to capture a photo using your smartwatch.
But they can find a better way to put a camera in the smartwatch, can't they? Really, try finding room inside the smartwatch to do that effectively. There's so little room left in the watch beyond the space utilized by the battery. But of course this is a moot point since you can't capture the image from looking at the back of your wristwatch. And try to play the latest and greatest mobile game on your smartwatch. What a dreadful experience! It's just logic folks, but like I said before, "Apple and its smartwatch peers are playing a game of fooling the retailer into thinking this is the next great mobile device." And all of this as retailers are forced to slash the prices for smartwatches and smartwatch vendors are forced to " try again."
Apple has deeper problems to consider than the smartwatch and as its sales are falling now for most every product segment. I think Apple saw in the smartwatch an opportunity to duplicate its successful smartphone imitator heritage status of making existing products even better. Unfortunately, what Apple realized was that sell-through of smartwatch devices from the start was poor and they were poor based on concept and functionality. Even Samsung's second-generation smartwatch device has only been projected to ship nearly half of its predecessor model. And please be careful with those forecasts and data tracking for sales of smartwatches by IDC as they are often highly erroneous and found with constant revisions. That is the track record for most everything tracked by IDC.
Whether it is the lack of applicable photography capability or the now understood gaming incapability, the smartwatch bulls will be found pushing up against an immovable object of human anatomy and physiology. As has been consistent with my avoidance of investing in shares of AAPL I offer the following reason for the decision: Apple is a great company with billions sitting on the sidelines waiting to be deployed and some of that already having been deployed. Apple foresaw this wall of declining iPhones sales before them and they must have as we are to accept that they are an incredible operator given their track record. Additionally, most every product segment Apple owns is now in decline, and yet they have not offered anything in the last couple of years that could possibly offset these declines. It's a conundrum that investors are faced with. Apple has had a string of success in the 21 st century, but what will come next to continue with that success? Simply put, we will have to wait and see. As such, there is money to be made elsewhere and most likely.
Disclosure: I/we 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.