Smart Wearables - a $30 billion dollar opportunity

Over the past year I’ve been following the hype around smart wearable technology. Fuelled by the enthusiasm of the big players to embrace this market, analysts are falling over themselves to define and inflate the size of the wearable market opportunity, predicting a market worth over $30 billion by 2020. That belief is driven by a desperate need for major companies to find something to follow on from laptops, tablets and PCs, all of which are being commoditised. In his seminal book on technical disruption “The Innovator’s Dilemma”, Clayton Christiansen warns that “no one can learn from market research what the early market will be. I can hire consultants, but the only thing I can know for sure is that their findings will be wrong”. As I look at the current predictions, that warning feels worryingly appropriate.

The problem is that most of the models being used to estimate the consumer appetite for wearable technology are built around technology push, with manufacturers trying to shape their technology to fit what they believe consumers will buy. It’s a strategy that is likely to fail, as wearable technology is more personal than any product they’ve ever made before. To try and see whether there is a market, I’ve put together a report that looks at the market opportunity from the contrary viewpoint, building it up from known consumer behaviour and preferences. Whilst there’s no guarantee that doesn’t fall into the same Christiansen trap, it suggests the market could still reach $30 billion in 2020, but with a very different mix of products being made by some very different companies. You can download the report here.

Despite the hype and the number of products that show up at events like CES, the different market segments will evolve at different rates. Of these, five of them feel fairly well defined – Sports and Fitness, Hearables, Personal Medical and Assisted Living, Kids and Pets and Fashion. Two of the more hyped segments – Smart Wearables and Augmented Reality are a lot less clear.

Sports and Fitness is probably the best developed of the various segments. It’s been with us for several years, having evolved from pedometers and running shoes to the plethora of wristbands that are an attempt to recover the naked wrist. The promotion of fitness as an obvious wearable device is pushed fairly fanatically by an industry that would like us all to care about our health, often with a near-religious conviction that gym membership and a hard body are synonymous with love, life, happiness and wealth. However, a closer look at gym membership shows that it’s a message that has limited appeal. The global active gym membership is only around 40 million at the moment and is unlikely to double in the next five years. That’s not an insignificant size, but only a small percentage of those will be happy to accept the price point of current fitness devices, which can command prices from $100 - $250. At the low end, far Eastern manufacturers are already shipping significant volumes of sub $15 wristbands.

Nike has already withdrawn from hardware to concentrate on applications. The question is whether users will pay for these, or expect free Apps? Alternatively, low-cost wristbands could be bundled with App subscriptions. Both raise the eternal question for wearable devices, which is how long they will remain compelling before they get consigned to the back of the drawer. The result is that by 2018 this market may have peaked at just under $1 billion, splitting into high-end pro-amateur devices and low cost service driven wristbands.

The other side of fitness – health and assisted living has been around much longer, but has the dual constraints of medical regulation along with insurance and national healthcare schemes, both of which act to slow growth. Despite that, there are some interesting innovations, not least the current Tricorder competition, funded by the X-Prize foundation. This is offering a prize of $10 million for a team which can construct a device like the eponymous Tricorder of Star Trek fame which can diagnose fifteen common diseases. Most of the final teams include some degree of wearable technology, which is why it fits in here.

It’s unlikely that any team will meet these criteria by the competition’s end, but some will get close and start selling. When they do it will kick off an industry that could make considerable service revenue by offering almost instant home diagnostics for everyday ailments. The medical profession will probably fight it tooth and nail, but outside Europe and the US it could provide a major market for wearable technology, although it may struggle to reach sales of much more than $100 million by 2020. That’s a similar size to the potential market for assisted living devices. These are growing steadily as life expectancy increases, with baby boomers prepared to pay for monitoring devices which allow their parents to stay in their own homes. It’s a guilt sale to help justify not having your parents live with you, but guilt sells.

The other guilt trip will be for asset tracking, specifically kids and pets. Whatever W.C. Fields may have thought about working with animals or children, this could be another segment which elevates wearables to a mass market. Despite the success of the human race in growing to over seven billion members, more and more pressure is being placed on parents to monitor every moment of their children’s lives to protect them from the allegedly scary stuff of life that’s all around us. Baby monitors are no longer sufficient; the caring parent is being offered the opportunity to monitor their babies 24/7 with devices ranging from smart socks to smart sleep suits. Not only can they warn you of any change, they’re also spawning services which can compare your baby’s development with others, allowing every parent to live in the comforting knowledge that their child is above average.

Once they’re up and walking, a new generation of child trackers will continue to allow parents to track their children as they go through nursery to school. It’s quite possible that schools will jump onto the bandwagon, rolling out monitoring systems to generate a new era of constantly monitored kids. Between them, the market should easily reach $700 million a year by 2020, with the opportunity for considerably more in service revenues.

No children? No problem. There’s already a healthy market for pet tracking. A number of start-ups are currently targeting the 200 million dogs and cats in the US, generally focussing on two areas – trackers for the animal, to find them it if they are lost; or activity monitors to find out what they might have been doing, allowing owners to assess the mood of their pet. The latter panders to the trend to humanise pets as members of the family, but anthropomorphising animals is a tried and trusted model in many markets from children’s books to canine wedding ceremonies. Some products, like the TAGG pet tracker have taken on board the power of fear in driving sales, quoting an ASPCA statistic that “every two seconds a pet is lost”. They use that to sell a service plan of $9.95 a month for the first pet and $4.95 for each additional one on top of a $199 hardware sale. It’s a market that should be worth at least $300 million by 2020, with potential to exceed that. We all know the Internet is about cute cats. It looks as if the Internet of Things will be about quantified cats.

One of the smaller markets will be smart fashion, although it has the potential for explosive growth. Today it is the least developed, mostly making bespoke, connected clothing for celebrities and the catwalk. However, the ability of those purchasers to pay has spurred innovation in smart fabrics and manufacturing, which will eventually make its way through to higher volume consumer clothing.

The problem with a lot of smart, connected clothing is making it individual and supplying it in multiple sizes. Then there are the issues of washing and charging the garments. Both will slow this segment of smart wearables down for some considerable time. But there is an interesting opportunity for what I term social clothing – where one, or a few sizes could fit many. This year Foxtel released just over 2,000 active sports shirts which let fans feel what major players were experiencing whilst playing in the Australian football league. It was an experiment, but with some further development could lead to connected fan shirts for major sports clubs. Fans would not just see the game, but feel it, opening up sensation as the next generation of content. It’s a highly speculative opportunity. Without it, smart clothing will struggle to sell more than a few tens of millions of dollars’ worth of clothing each year for the foreseeable future. But if social or fan clothing can be made to work, there is a potential clothing plus subscription opportunity that could exceed $100 billion a year. It’s possibly the single largest revenue stream for smart wearables.

Within the smart fashion category we should not discount smart jewellery. Swarovski’s recent entry shows show a true fashion company thinks. For them, everything is about brand, not branding. It’s an important distinction which could see them and others in that industry outselling many of today’s wristbands and smart watches.

Which brings us to what appears to be the most certain segment of smart wearables, which is hearables. I coined the term a year ago to describe the things we put in our ears. Until recently that’s mostly been Bluetooth headsets, but the market’s changing rapidly as technology advances. Last year, sales of wireless stereo headsets started to take off as new generations of lower power Bluetooth chips came to market. At the same time, Apple launched a proprietary version of Bluetooth low energy which allowed hearing aids to connect to an iPhone, streaming music and well as voice calls. Hearing aids supporting that saw a sudden increase in sales, suggesting that they are beginning to move to becoming more fashionable. The Bluetooth standard is evolving to bring an even better quality, low power audio performance to all hearing aids as well as a new generation of wireless stereo headsets with an extended battery life.

That’s not all that’s happening in the ear. In the next few months we’ll also see the first of a new generation of wireless ear buds come to market which incorporate a range of health and fitness sensors. These will challenge the wrist as the site for the next generation of fitness devices. We’ll also see headsets which can stream directly, removing the need for a mobile phone. These will all take advantage of the fact that music content is already a well-established service, allowing innovation on top of an existing service model. Conservative figures for these hearable devices suggest a market revenue of almost $18 billion in 2020, making it the most successful smart wearable category.

Then we have smart watches. They are the darlings of the analysts, but I’m less sure. So far, this is a market where the only real success, in the form of the Pebble watch, has come from a company that doesn’t make phones. Prior to the announcement of the Apple watch, most other phone vendors were falling over themselves to introduce one of more models, none of which seemed to have a clear idea of why it existed. I’d been expecting to feel the same about the Apple watch, but found I rather liked it. It did a clever trick of reversing the trend. Instead of complementing the phone it appears that it will make the phone complement it. In doing that, Apple has set an interesting precedent. If it succeeds, it will probably take the lion’s share of the market, which could grow to $15 billion by 2020. But Apple will take almost all of the profit, leaving the remainder of the market to Android copies and low cost wristband watches which sell for a few tens of dollars. If it fails, then the whole smart watch market may sink with it.

Finally there is augmented reality, whether that is the fully immersive experience of the Oculus and its competitors, or smart glasses. I have difficulty with assessing the virtual reality market, not least because it is almost unique in a wearable device in isolating its wearer from society. Mark Zuckerberg has suggested that between 50 and 100 million rifts will have sold by 2020, which equates to annual sales of around $10 billion. Some will claim that he has to say that, but the numbers seem feasible. I’d still keep it off my overall list of wearable revenue, as it is such a wild card.

Then there are smart glasses and in particular Google Glass. The recent announcement to restart the program felt pragmatic, as there are very obvious commercial uses. However, much of the media seemed to interpret it as failure for the segment. I’d suggest the opposite. If Glass can succeed and be seen to work, this repositioning will do an important job of countering the social resentment to these products. Without that, smart glasses may have difficulty in moving beyond sports accessories.

Putting those together, smart watches will dominate sales in the next few years, assuming Apple doesn’t get their watch badly wrong, but from early in 2018, hearables will begin to overtake them. After that, hearables will grow more strongly than any other segment. The only sector which looks as if it could challenge either is smart clothing, but in this timeframe only if social clothing for sports fans takes off. That will put pressure on technology to deliver – the big opportunity is probably a few years later in the 2022 World Cup, when smart clothing and the associated subscription revenues could overtake any other sector.

2014 was a year for experimenting. 2015 should be a more formative one, when we will see whether the initial purchases found favour with consumers or whether they dismiss the whole sector as unnecessary. However, there is enough diversity of ideas, products and companies to see more innovation than we have ever seen before in consumer electronics. With luck we should also see the emergence of new service models, which will be vitally important. Without them, smart wearables are little more than a box shifting market, which will rapidly become commoditised.

There are major challenges. Battery life is probably the biggest, particularly if consumers are expected to purchase multiple smart wearables. So is keeping them clean. To make them compelling, manufacturers need to use the data from the sensors within them to keep us addicted to their use. That raises issues of privacy, which are still to be explored. All of these could turn off consumers or delay the market growth by years. As Clayton Christensen warns, most market analysis of completely new sectors is probably wrong. But the advent of new sensors, new funding models and ubiquitous connectivity means that the potential exists to make it happen. How it will turn out is difficult to predict, but the ride will be fun. You can download the full report from “The Market for Smart Wearable Technology”.