Mobile World Conference in Barcelona is typically a showplace of the newest and best cell phones that companies have to offer. At the 2015 MWC though, you could have easily have thought it was a wearables trade show. Practically every company had a fitness tracker, a smartwatch, or another form of wearable technology on display. But at MWC 2016, there were barely any wearables to be found. What happened? And is this the writing on the wall, showing consumer and company interest in wearables is just not that high? Or are there other factors at hand?
First, it is important to look at where the market was last year. Coming out of the holidays, fitness trackers were all the rage. Fitbit had posted record numbers and new bargain options such as the Vivofit sold extremely well. From a product development standpoint, it looked like a great business to be in. As a company, if you were eyeing the wearable space, this was an easy point of entry since fitness trackers don’t require complicated software or complex UI development. On the smartwatch side, the market was waiting with baited breath for the Apple Watch to launch. Products were being rushed to market and announced prematurely because if you were a company looking to enter the market, you wanted to show off what you were working on before Apple’s device launched in “Early 2015.” Having seen how Fitbit already owned the fitness tracking space, companies wanted in on smartwatches before there was a clear leader. All of this resulted in a staggering number of wearable devices being showcased during MWC 2015.
So what happened over the past 12 months? Does the absence of pretty much any wearables devices at this year’s Mobile World Conference mean that the technology is dying? Our view is: no. Around the time of last year’s conference, wearables were beginning to start the process of becoming a mature product category. Fitness trackers finally moved from niche to mainstream with the Fitbit and it looked like Apple was about to move the needle on the extremely small smartwatch market. If you were looking to enter the market while there was still room to easily carve out space, last year’s MWC was probably the last point. Everyone who wanted a part of the “next big thing” threw everything they had against the wall with the hope that something stuck. Unfortunately, for most companies it did not.
Fitness tracking devices have had a rough past year. There is very little that separates a competent bargain priced fitness tracker from a really nice one. They are all performing the same data collection (steps, activity, and sleep) so why pay $100 for a tracker when you can spend less than $20 for one that does the same thing. Several companies realized this, including Chinese electronics maker Xiaomi. Xiaomi launched the $15 Mi Band and quickly became the number 2 fitness tracker producer in the world, manufacturing a quarter of all wearables sold. Essentially the Mi Band began the race to the bottom for fitness trackers. Low prices mean tiny margins; this alone is enough to keep possible competitors from entering the market. Fitbit’s current woes also are keeping new entrants away. After going public last summer, the wearable device maker’s stock has dropped over 76% from its high of 51.64. It has been plagued by patent lawsuits, a class action lawsuit, and, most recently, offered significantly lower guidance for the upcoming quarter than expected. Despite decent sales over the past 3 months, Fitbit seems to communicating that the growth is not sustainable. From the outside looking in, this points to less than ideal circumstance to be entering the market – the largest player has decent margins but is projecting disappointing earnings and the next largest player is so inexpensive they have almost no margins.
Despite these issues, we believe the fitness tracker market is here to stay…it might just begin to look a little different. More than likely the segment will separate out into 3 categories. First will be the low cost category. This is where the Garmin Vivofit and Xiaomi Mi Band reside. Most competitors will attempt to avoid this race to the bottom (and away from margins) by distinguishing themselves in the market. Misfit and Fossil are doing this through design. Companies with devices in the fashion category will rely on style to demand a premium price. Whether it is a beautiful aluminum housing or a leather fashion bracelet, consumers will always be willing to pay a premium for a design they fall in love with, even it is offers the same features as a $15 model. The other way differentiate a fitness tracker is to make it connected. Trackers in the connected category use Bluetooth to communicate with your cell phone, alerting you to notifications, phone calls, and even displaying texts and emails. Not quite a full smartwatch, these are the wearables for people who want to have some of the features of a smartwatch at a lower cost. Connected fitness trackers will likely continue to demand a premium (and therefore healthy margins) for some time. Last year we saw Garmin seriously enter this space with the Vivosmart and Fitbit just took it seriously with their new Alta fitness tracker. Connected and fashion fitness trackers require much more extensive design and development than a run-of-the-mill tracker, we believe this has caused a lot of companies who were hopeful about the segment to jump ship. 
Smartwatches are a bit different though. While the race to the bottom is beginning for fitness trackers, the average price of smartwatches has actually gone up over the past 12 months. For example, last year at this time you could pick up a Moto360 for under $200, right now the second gen version of Motorola’s smartwatch costs $300. You would think that this would mean everyone would be jumping onboard the smartwatch market then, but they aren’t. Smartwatches are tough to make. Besides design and fit needing to be spot on, you also need to cram a substantial amount of electronics safely inside a tiny space, optimize battery life, and create a complete user interface paradigm from scratch. This is an enormous hurdle to overcome! To get a product to market fast, a lot of companies take the collective learnings of Google and license Android Wear. In fact, most of the smartwatches shown at MWC 2015 ran Android Wear. While this is an amazing way to quickly launch a smartwatch without having to sweat the software development, Google does not yet allow customization of the Android Wear experience. Besides being able to include some custom watch faces, the Android Wear experience on one watch will be identical to that on another. Android phones, by contrast, allow manufacturers to apply custom UI layers. Therefore, there is very little besides design to separate one Android Wear device from another. Up until November they all even ran the same chip set! This resulted in the most successful players either producing the best designed and made watch or being an already entrenched player. All of the “me-toos” just faded away since there were so few ways to differentiate themselves.
While it is possible for companies to go at it alone and create an unique experience, phone manufactures make it difficult. Apple, Google, and Samsung (three of the largest players in smartwatches) all control operating systems of phones (Samsung via a very heavy skin on top of Android). This means they are able to provide unique and compelling software hooks between their phones and smartwatch platform that competitors cannot. For example, the Apple Watch is the only wearable that allows you to natively send texts directly from the device. Pebble has had the most success at going at it alone, but the limitations put in place by phone operating systems means that Pebble has had to design creative workarounds. Despite connectivity limitations, going at it alone might be the best bet for most companies dreaming to entering the smartwatch business. It allows them to find unique way to differentiate themselves. For example, Pebble has found great success due to their e-paper screen and Olio found an audience due to their device’s unique app-less paradigm.
Mobile World Conference 2016 had so few wearables because the market is becoming more stable. Major players are separating out, consumers are choosing an ecosystem, and the market is becoming less like the wild west. If you had a traditional wearable you probably launched it in time for the holidays and if you had an untraditional wearable, you probably were showing it off at CES. As the “me too” products fade away, we are beginning to be left with the serious contenders. The lack of wearables at MWC don’t point to a dying product segment but instead to maturing one. To put this in perspective, last year’s MWC reminded us of how there were over 1,800 brands of automobiles sold in the US between 1896 and 1930. Everyone wanted a piece of this new product category. But such market diversity is not sustainable in the long run and hey companies emerge. The same thing has happened with wearables, it just didn’t take 34 years!
