Quick Take on Disruptive Potential of Smartwatches

Just a few quick notes on the disruptive potential of smartwatches.

Smartwatches will not be disruptive to watches

This is very important. This tells you who will be the main players in the smartwatch market in the mid- to long-term. Smartwatches add features to traditional watches, and will often be more expensive than comparably built watches. Therefore, it makes perfect financial sense for incumbent watch makers like Seiko, Citizen, Swatch, Tag Heuer, Casio, and others to make a smartwatch. We are already witnessing this. If incumbents are motivated to fight back, the probability of an entrant being successful is greatly diminished.

Whether the incumbents (traditional watchmakers) can succeed in making a good smartwatch is another question, but given that the operating system is already freely available as Android Wear, and that the Shenzhen ecosystem should give them the electronic components that they need, it is likely that despite not having prior excellence in electronics, incumbent watch manufacturers will be able to create smartwatches that are almost as good as the ones coming out of Samsung, LG, Motorola, etc. Since brand and design are very important for selling wearables and that there is no easy way for entrants (smartphone OEMS) to acquire a strong brand image (i.e. they don’t sell strong brand images in Shenzhen), it is likely that the incumbents (traditional watchmakers) will prevail in the smartwatch space.

Smartwatches will be disruptive to smartphones

Instead of being disruptive to watches, smartwatches will be disruptive to smartphones. Smartwatches will make many of the smartphone computing tasks more convenient and easier to accomplish. Although their current functionality is rather limited, it is very likely that advances and innovations in both hardware and software will quickly expand the scope of tasks that we can accomplish with smartwatches.

For the most part, this will be a new-market disruption as opposed to a low-end disruption. In low-end disruption, you would typically target the least demanding customers. However, in the current format, smartwatches will depend on the user also having a smartphone nearby. A typical user will need both a smartphone and a smartwatch, so they will not be the least demanding customer.

Instead, smartwatches will be new-market disruptions. They will enable customers to interact with computers and the Internet in ways that were previously impossible or cumbersome.

Now in the previous section, I argued that traditional watchmakers will prevail in the smartwatch market. They will gain share of the total compute time per user. The question then is, who will lose share? Who will be disrupted by this new market disruption? My argument is that here the incumbents are smartphones and that smartphones will be disrupted by smartwatches.

Without going into detail, this is what I expect the smartwatch landscape to look like after the dust has settled;

1. Apple will be the undisputed number 1. They will aggressively innovate on the Apple Watch, even to the extent that it cannibalises the iPhone. The Apple Watch will gradually become more and more independent of the iPhone.
2. The current Android smartphone OEMs will initially play in the smartwatch market, but they will fail to make profits due to their lack of brand power. Eventually most will retreat from the smartwatch market and focus on making big and powerful smartphones. The few that remain will only get the scraps from the very low-end of the market. The exception might be Samsung. If their Tizen operating system enables them to innovate faster than Android Wear, there is the possibility that Samsung will be able to profit from smartwatches (due to the lock-in they get).
3. Current watchmakers will be the major Android Wear players in the smartwatch space, especially in profits. The electronics will be provided by the Shenzhen ecosystem or a chipset provider (maybe Intel). Depending on how well Google can monetise from Android Wear, we might see some rapid innovation.
4. Smartwatches in general will become more and more independent of smartphones. Ultimately, people may not carry a smartphone but instead carry a MiFi-like cellular connection device paired to their smartwatch (due to the battery requirements of connecting to a cellular network). For tasks requiring a larger screen, customers might carry a tablet-like device. The theme here is that smartphones will be at least partially replaced by smartwatches.

Final thoughts

Clayton Christensen famously misunderstood the disruptive potential of the iPhone. He saw it as a sustaining innovation to feature phones, and expected the incumbents to quickly respond and shut out the new entrant (Apple). Part of his mistake is that he failed to see how the iPhone would be a new-market disruption, making PC tasks possible on a mobile device.

We should be careful not to repeat his mistake. We need to be careful in understanding to which markets smartwatches are sustaining, and to which markets smartwatches are disruptive. If we fail to correctly assess this, we will end up with the opposite prediction.

Here I make the potentially controversial prediction that the traditional watchmakers will prevail and that smartphone OEMs like Samsung, Motorola and LG will drop out of the market. This will be the measure by which my understanding of disruption theory should be judged.

Update

Since many people will understandably have an issue with smartwatches disrupting smartphones, I think I should go into a bit more detail. Instead of going into logic, I will give my understanding of what happened when the iPhone entered the market (Christensen’s mistake) and examine the parallels with the Apple Watch.

1. Smartphones did not disrupt the mobile phone market: Many people think that the iPhone disrupted the mobile phone market. Disruption means that new entrants successfully displaced the incumbents. While this is certainly true that one entrant, Apple, gained 8.4% market share of total mobile phones, if you look at the other players, the mobile phone market is still mostly comprised of incumbent companies that used to sell feature phones. These companies were fortunate that Google provided Android for free, so that they could easily and quickly develop their own smartphones. Some may note that Blackberry and Palm almost completely disappeared. I would argue that if you look at the total mobile phone market, they were never more than a small niche so they weren’t really incumbents at all. As for Nokia, they simply bet the company on the wrong horse. If they had chosen to use Android, there is little doubt that they would have still been a force to reckon with.
2. Smartphones disrupted PCs: To understand this, you have to lump smartphones and PCs together to create a “personal compute market”. Ben Bajarin has done this, and the following chart shows what has happened. PCs have clearly been overrun, and importantly, neither Microsoft itself nor any of the PC OEMs (with the exception of Lenovo which is very agile at M&A) successfully made the transition to smartphones. This is what disruption looks like.
   

Now if we apply this to the current smartwatch situation, we can expect the situation I described in 1) to happen to the current watchmakers, and the situation I described in 2) to happen to the current smartphone OEMs.

So for current watchmakers, they will quickly adopt the new emerging technology, and the freely available Android Wear will help them immensely. The Shenzhen ecosystem will also help on the hardware side.

On the other hand, smartphone OEMs will dabble in smartwatches in the same way that DELL and others briefly entered the smartphone market (Dell Streak 5, HP iPaq). Notice the bulkiness and inelegance of their offerings, which reminds me of the bulky and unfashionable Android Wear devices that we are currently seeing from Smartphone OEMs.

In a few years time though, I predict that smartphone OEMs will mostly exit from smartwatches, just like DELL and HP did. There seems to be something that holds back incumbents in the higher spectrum of the market from creating something that is simpler and more elegant.