After years of false starts and stalled adoption, it was beginning to look like wearables were finally finding an audience. But the past week has brought nothing but sour news making one wonder if the connected devices are nothing but a fad. First Fitbit predicted a slow Holiday quarter, then Lenovo/Motorola announced the termination of the Moto 360, next Pebble shut down and sold off its assets for a pittance, and finally IDC released embarrassingly weak 3Q Apple Watch sales numbers. What is happening? Are wearables dead or is there more to it? While we might be a bit biased, we don’t see a reason for concern, yet. Let’s take a closer look at these headlines and the health of the industry as a whole.
First let’s talk about Fitbit. Without a doubt, the most compelling and demonstrable reason to purchase any wearable device is fitness tracking. This has proven to be the “killer app.” I am not sure it is what keeps people strapping the device on everyday, but it is without question what gets the units out the door and into consumer’s hands. And Fitbit is the name brand of fitness trackers. Chances are, even your least tech-savy relatives know of Fitbit and what their devices do. The problem for Fitbit though is that there is very little functional difference between their $150 premium tracker and a $15 Chinese one. If the purpose of your device is to simply track steps, calories, and distance, why should you pay 10x more for a premium brand. Fitness trackers are a commodity, there is very little to separate one device from another, and Fitbit is beginning to realize that. Fitbit has lost a huge percentage of its valuation over the 16 months because its devices are expensive and are no longer capturing the type of excitement they used to. Don’t get us wrong, Fitbit is still a strong market leader but it has been on a long, steady decline. The good news for Fitbit: they realize change is needed and are looking to diversify before the bottom drops out of their market. The acquisition of Pebble’s IP, including their PebbleOS, was a smart move and enables Fitbit to provide something unique and proprietary to the market. An operating system is a differentiator in the market and can provide a true competitive advantage. Even better, if users like PebbleOS, they will become invested in the Fitbit brand.
On the smartwatch side, let’s take a look at Pebble and the Moto 360. Both of them hit the end of the line because of a lack of innovation. Pebble launched without any real competition and had tons of empty highway ahead of it (the first Android Wear device didn’t go on sale for another year and a half). Pebble squandered its lead with a slow rate of innovation and continued to double down on connectivity and notifications. The market was clearly pushing towards activity tracking, yet Pebble didn’t ship a model with a heart rate sensor until this fall. Version after version they did not address key user complaints (i.e. no touchscreen, the giant bezel) and were unable to offer a level of interactions nearly as deep as the competition. The writing has been on the wall with Pebble for some time and, combined with their repeated use of Kickstarter (serving as equity free financing), no one should have been surprised by them shutting down. Unfortunately once robust competition entered the market, Pebble wanted to play in the same field as the big boys but were in over their heads. I think if Pebble continued to operate as niche player they would have continued to exist for some time, but the company either didn’t see themselves as that or were unwilling to accept it.
The discontinuation of the Moto 360, on the other hand, was a surprise but, in retrospect, not surprising. When the original Moto 360 launched in 2014, it was the device. Full Android interaction via the new Android Wear OS, an eye catching premium design, and, most importantly, a round watch face! This was the device the market had been waiting for. For the 1st generation of Android Wea
r devices, this was the wearable everyone was trying to catch up to. There was one catch though. The Moto 360’s screen was not actually entirely round; the smartwatch’s screen had an aesthetically unpleasing “flat tire” screen. Lenovo/Motorola said that the flat area at the bottom of the screen was needed to house sensors. Over the next 12 months other manufacturers figured out how to produce entirely round screens and it was assumed that the launch of the second generation Moto 360 would bring a fully round screen. But when the second generation of the wearable was announced last September, it was clear Moto dropped the ball. First, the name. Lenovo decided to officially call the new version of the smartwatch Moto 360. That is right – new device but no update to the name. Not only did this leave consumers confused, it also lead to journalists being unsure how to refer to it [gen 2 or (2015)]. Second, the price. The original Moto 360 cost $250 (and could be found for as little as $150 by the time the 2nd gen launched) but the 2015 version was almost $50 more expensive ($299). For $50 more you would expect to get more watch for the money, which brings us to the third issue, lack of innovation. Yes, Lenovo’s hands were slightly tied due to reliance on another company’s OS, Google’s Android Wear, but there was still room for innovation. After a year of development, the screen still had a “flat tire,” the watch’s form factor was most untouched, and no significant features were added. In fact the only changes were a 25% larger battery, an updated processor (bringing them into parity with other smartwatches), a slightly higher resolution screen, and interchangeable watch bands. Hardly worth a $50 price increase over the original. The operating system was the same version available for the original device, the only new features were interchangeable watch bands, and, most importantly, the screen still had a “flat tire.” The highly anticipated Moto 360 Gen 2 entered a very competitive market to a collective shrug. Dollar for dollar there were significantly more interesting smartwatches on the market. Lacking strong sales following a half hearted update, we should have guessed that the Moto 360 line, one of the original marquee smartwatches, was doomed.
Last week IDC reported that the Apple Watch had a horrendous 3rd quarter. According to the research firm, Apple only shipped 1.1 million units representing just 4.9% of the wearable market. By comparison, Fitbit captured 23% of the market (5.3 million units) and Xiaomi, who produces the ultra affordable Mi Band, captured 16.5% of the market (3.8 million units). For the same quarter last year, IDC estimated Apple sold 3.9 million units representing 17.5% of the wearable market. But the apparent weakness of the Apple Watch is tough to read into. First, IDC doesn’t have real numbers. 
Apple has stated that it will not release sales numbers for the wearable, so any numbers are and estimate based on extrapolation. Second, the new generation of Apple Watch had barely launched by the end of the 3rd quarter. It was widely known that Apple was planning to update their watch in September which would have tempered demand. After IDC released their numbers, Apple CEO Tim Cook offered a rare public rebuttal via Reuters. Without providing specifics, he told the news outlet that the first week of the holiday shopping season saw Apple Watch’s greatest sell-through of any week in the product’s history and that the Apple Watch was on track for its best quarter ever. It is tough to know who to believe here, but it is possible they are both correct. Similar to the iPhone, consumers know when a new device is coming and demand for the existing model likely stagnates. The updated device, featuring a much improved user interface and new hardware features, likely caused a surge of demand that will continue well through the holiday season. While the smartwatch market is showing signs worth concern, IDC’s numbers seem to be snapshot illustrating a common sales trajectory for Apple’s consumer electronics; we are not sure that Apple is in a place to worry, yet.
So where does that leave us feeling about fitness trackers, smartwatches, and the health of the segment. First, if you are selling nothing more than a simple fitness tracker and your product line starts above $20, there is a huge reason to be concerned. According to IDC’s numbers, 16.5% of the wearable market belongs to Xiaomi, whose Mi Band and Mi Band Pulse sell for under $15 (they even offer a version with OLED screen and heart rate sensor for under $50). By comparison, the least expensive Fitbit lists for $50. Functionality wise, they both accomplish the same tracking and the Mi Band is actually more full featured. Fitbit’s sales continue to be so strong because they are the most recognizable and established brand. But without standout features or drool-inducing industrial design, consumers will eventually migrate to value. While we believe the fitness tracker market is in a race to the bottom, Fitbit’s purchase of Pebble’s intellectual property, including PebbleOS, will hopefully separate them from the pack. An established , proprietary operating system with apps has the ability to draw in customers and bind them to a platform.
On the smartwatch side, things are a bit murkier. First we don’t believe the segment is dead or dying. Pay attention to how many people you see wearing a smartwatch in a given day. In Manhattan, it is tough to walk a block and not see someone wearing one. While you could read into sales from that, the more important metric is that it means people are still wearing their smartwatch. Last year we had a conversation with Jewelbot’s Brooke Moreland and Sarah Chipps where we discussed that continued use is the biggest issue facing wearables. Before the Apple Watch launched, statistics showed that only 25% of wearables continued to be worn after 3 weeks. That is lousy stat but, based on the number of smartwatches I see in a given day, I believe continued use has gone way up, which means consumers are finding use cases for their devices. But as the Moto 360 failure points out, consumers are expecting innovation. If Apple Watch sales are as strong as Tim Cook states, it is a result of the updated Apple watch adding requested hardware features and reimagining of the user interface around how customers actually utilize their device. Innovation and responding to consumer needs are key to the smartwatch segment thriving. To that end, Android Wear devices are left holding the short end of the stick. They are dependent on Google for software and (for the most part) hardware innovations. Google does not currently allow device makers to customize or skin the Android Wear platform. That means functionality wise, there is little difference between one device to the next and, besides design, little reason to choose one Android Wear watch over another. While it has created a fragmented phone ecosystem, the best thing Google could do to give a boost to the smartwatch market is allow manufacturers to customize the operating system. This would give companies the ability to uniquely customize functionality, rethink the user interface, and make hardware innovations.
Wearables are approaching a tipping point. They will either thrive or collapse based off of one thing: innovation. Innovation separates one company’s devices from another’s and drives adoption. The more innovation, the more likely existing customers are to stay invested in the segment and the more likely new customers are to find a reason to make their first purchase. Lenovo/Motorola and Pebble didn’t continue to innovate. Fitbit is recognizing the need to innovate. And Google needs to allow Android Wear makers to innovate. The good news is that as long as people are still putting on their smartwatch or fitness tracker everyday, there is a market ready for the next best wearable.
