Apple Watch Series 2 offers glimpse of smartwatch future

Focuses on fitness, but there’s a long way to go to major smartwatch growth

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With the Apple Watch Series 2 announcement on Wednesday, Apple focused on using the upcoming smartwatch for fitness. It includes built-in GPS for tracking hikes and distance runs and is “swim-proof,” or water-resistant to 50 meters.

Of course, the Series 2, on sale for $369 on Sept. 16, will be good for other things, like messaging and Apple Pay. But Apple chose to dwell on fitness, a pivot away from the way it marketed the original Apple Watch, which shipped in April 2015. Some Pokemon Go functions will even be added later in the year to the S2, encouraging users to get outside and explore as they discover Pokemon creatures. (Players will still need a smartphone to actually capture a Pokemon, however.)

Analysts see Apple’s new fitness focus as a way to dig into the top-selling fitness bands from Fitbit, which start at $60 and average over $100 each. In doing so, Apple sought to clarify and simplify the purpose of buying a smartwatch, with hopes of getting the camel’s nose inside the tent so users can explore other functions.

The lessons Apple learns will be instructive for other smartwatch makers and are destined to shape how all types of wearable gadgets evolve in the next 20 years.

“People still don’t know what to do with a smartwatch device,” said IDC analyst Jitesh Ubrani. “Focusing on fitness is like Apple’s Trojan horse to get users to slowly start to use a smartwatch for other things, like notifications. Apple hopes they will later realize the value.”

Apple’s newfound approach will be scrutinized by the entire smartwatch industry, which saw a gaping 32% decline in the second quarter of 2016, according to IDC. That decline came about because Apple Watch was by far the biggest in smartwatches (with 1.6 million shipped) but nonetheless saw a decline of 55% for the second quarter compared to a year earlier. Meanwhile Samsung, Lenovo, LG and Garmin all experienced gains.

For all of 2016, Apple Watch shipments will be down somewhat from the 11.3 million that were sold in 2015, although final numbers are still being tabulated by IDC and will be released later this month. Fourth quarter sales of the Series 2 and previous models won’t be enough to offset the loss for all of 2016, Ubrani said. In 2017, the Apple Watch will see a rebound in sales, he predicted, with growth in every year through 2020.

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“Fitness is the easiest selling point at the moment for wearables,” agreed Carolina Milanesi, an analyst at Creative Strategies. “Fitness bands [like Fitbit] are still outselling smartwatches and some of it is due to lower price. But some of it is due to the fact that consumers are still not quite sure what smartwatches can do for them and if it’s worth paying more.”

Patrick Moorhead, an analyst at Moor Insights & Strategy, is bullish on the latest Apple Watch innovations. If the new Apple Series 1 and 2 watches perform as well as demonstrated on stage, he predicted “sales will improve dramatically.” The next wave of smartwatch owners should increase the size of the total market by 10 times, a group he called the “early majority” instead of the “early adopters.”

Hyperbole with smartwatch sales

Other analysts were less bullish than Moorhead.

“It’s good that Apple is trying to reposition the Watch as a solution rather than a peripheral device [to a smartphone], but at its current $369 price point, it may have limited market appeal,” said Jack Gold, an analyst at J. Gold Associates. “I don’t see this will be a very high volume market for Apple.”

Gold said the price drop of the original Series 1 model to $269 would only make a difference in boosting sales if it had more features like those in the Series 2. Apple said Series 1 watches will have the same upgraded system-in-a-package (SiP) dual core processor and graphics processor as the Series 2 -- still not enough for Gold’s taste.

Ubrani said the smartwatch market is a “very, very small market and it will likely remain like that for a long time” even though there will be growth. Disagreeing politely with Moorhead, he said, “there certainly won’t be anything like a 10X improvement” in the next few years.

IDC has predicted 19.2 million smartwatches will ship this year, a tiny number when compared with the more than 1 billion smartphones that will be sold.

Future dreams

What seems to be driving much of the interest in the Apple Watch -- and the entire smartwatch market -- despite lower-than-expected initial sales, is a strong interest in where smartwatches and other wearables will eventually take us in the world of personal computing.

Could average people use a smartwatch in 20 years to replace a smartphone for video calls and to serve as a digital wallet, with the ability to pay for things? Can you carry a digital version of your driver’s license or identity card, with insurance and other information? With such a device, could normal workplace habits be changed? For example, could the smartwatch be used to open security doors through short-range wireless and help with passwords to log into highly secure behemoth computer systems?

Using the smartwatch as a person’s electronic wallet offers plenty of promise, according to Matthew Goldman, the chief product officer for Bankrate, a large provider of consumer financial advice and tools.

“People can pay more easily with a smartwatch that stays on the person,” Goldman said in an interview. “We talk to people with Apple Pay on their watch who say it’s much easier than using their phone. The phone isn’t that big of a differentiator from using a card in your wallet.”

Building a legacy

At one point three years ago, the upcoming original Apple Watch was seen as a way for then-new Apple CEO Tim Cook to leave a lasting mark on the computer industry in the post-iPhone era. But even before the disasterous drop in smartwatch sales in the second quarter of 2016, Samsung officials were bemoaning their early smartwatch results even after beating Apple to the market.

Cook and Apple have not said much about the recent downturn in sales, but Cook was predictably upbeat at this week's launch event. He pointed out Apple Watch is second only to Rolex, leads in smartwatches and tops customer satisfaction surveys.

“It’s important we delight customers,” Cook said. “Apple Watch set a high bar. We are just getting started.”

What’s still needed—a fashion flair

Apple’s focus on the fashionable design of the hardware and bands and even the simplified interface in Watch OS 3 will go a long way, and could influence the rest of the industry, Ubrani said. (A new ceramic white model was launched, along with stylish new watch bands.)

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“Fashion smartwatches are not a silly concept,” Ubrani said. “People are interested in new designs and pay attention. Many people, including women, weigh the design over the function. The problem of designing for women still exists.”

IDC has seen that when smartwatch makers pitch their wares to women buyers, “they tend to take their regular model and coat it in gold or add jewels, but that really doesn’t work because the smartwatch is still pretty large,” Ubrani added. “So it’s still a high price that appeals to one type of woman. Apple is doing a good job there but there’s still room for improvement.”

In Series 2, Apple still makes both a 38mm model and a 42mm model, which is a lot smaller than Motorola’s Moto 360 watches at 42mm and 46mm. The Motorola devices start at $300. The Apple Watch Series 2 keeps the same footprint as the original, but the new one is a “bit thicker,” Ubrani said.

In another comparison, Samsung is producing the round-faced, cellular-connected Galaxy Gear S3 smartwatch with a 1.3-in. dial size, which actually is below the 1.5 in. display dimension of the smaller 38mm Apple Watch. (But the overall case of the Galaxy Gear S3 is 46mm, up from the 42mm of the Gear S2.)

However they are measured, Ubrani and other analysts have said watchmakers still need to find ways to make smartwatches more stylish, with some models small enough for many women but large enough to allow for touch functionality.

“Large watches are in fashion, but by producing that, you are still ruling out a lot of people,” Ubrani said.

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“Because a watch is so much like jewelry, there need to be many more styles and many more brands that offer them,” added Moorhead. “ I fully expect all of the major traditional watch brands to bring out smartwatches in the next five years.”

Long-term implications

Nobody is talking lately about what a smartwatch will be in 20 years or whether it will be, say, a Dick Tracy two-way live video communications device. The realities of early problems with smartwatches seem to have tamped down the most lofty expectations of three years ago.

There seems also to be a recognition that despite the complexities of technology inside tiny smartwatch components (such as how the speaker mechanism pumps out water in the Series 2), they comprise a tiny market compared to the current rate of 1 billion smartphones sold in a year.

“We are looking at a multi-year journey,” Moorhead said. “Before smartwatches become a mass market device, a few things need to come into place: the experience needs to be fast and seamless without the requirement for a smartphone with a price around $200.” He estimated it will take five years for smartwatches to become mainstream.

“No doubt, wearables will play a much bigger role in coming years, but which form will be the winning one remains to be seen,” Milanesi added. “Most companies have looked at wearables as another revenue opportunity as sales of smartphones decrease. Apple, however, is playing a much longer game where the smartwatch starts with the familiar to build a dependency and trust, then builds on other things like health, connected home, Siri and more.”

The idea is that the smartwatch might eventually become a Swiss Army knife, with various applications turned on with connectivity in the cloud or the smartphone.

“What we term smartwatches today will morph in 20 years into specialty devices,” Gold predicted. “Some will be activity monitors like the new thrust of Apple Watch Series 2; some will be health monitors; some will be for gaming. Who knows where it will lead?

"I look at this like early phone units that were about phone calls, then we got email and networks improved," he said. "Then there was music, then web, gaming, GPS, health fitness and more. Instead of looking at the smartwatch as a peripheral device, it will be configurable to what we need it to do. And it will have connectivity to whatever services it needs, which could either be in the smartphone or the cloud.”

This story, "Apple Watch Series 2 offers glimpse of smartwatch future" was originally published by Computerworld.

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