KEY POINTS

  • Smartwatches were once touted as the next generation of devices set to transform consumers’ lives, but demand has since cooled. This is because consumers have become impatient with the technology's lack of capabilities like LTE connectivity and the anemic market for device-specific apps. After growing roughly 540% in 2015, the global smartwatch market declined 32% year-over-year (YoY) in Q2 2016, according to IDC. 
  • BI Intelligence estimates that shipment volumes will grow at a five-year CAGR of 18% through 2021 to reach 70 million devices. This is significantly lower than other market forecasts, which project 110 million to 120 million smartwatch shipments by 2020. But we believe that demand will continue to shrink because smartwatches don't have a well-defined function, remain expensive, and suffer from an undeveloped upgrade market. 
  • The smartwatch market has been afflicted by the Apple Effect. The introduction of the Apple Watch at the end of Q1 2015 drove total smartwatch shipments up to between 30 million and 32 million devices, according to Gartner estimates. But Apple’s ability to lift a market can also have an adverse effect. In Q2 2016, Apple Watch shipments fell 57% YoY, dragging down the rest of the market, according to IDC estimates. 
  • Android and Apple are poised to repeat their smartphone success in the smartwatch OS market. A duopoly would be somewhat beneficial to developers, as they would no longer have to choose between platforms to build for — or be compelled to create for several at once. Other operating systems, including Samsung’s Tizen, will have to fight to stake a claim in the market before Apple and Google assert their dominance. 
  • As it stands, there are just two primary areas where smartwatches have a clear use case: fitness and health care. These segments provide the best opportunity for developers in the near term, pitting smartwatches directly against fitness bands and other trackers used to capture data on a user's health for both personal and medical purposes. But outside of these areas, use cases and functionality are still limited.
  • Without certain features that they mostly now lack, smartwatches will struggle to attain mass adoption. These include stand-alone connectivity, better native apps, more powerful voice recognition, and more prolific payment capabilities. 
  • In addition, smartwatch makers have some work to do to convince skeptical consumers that they're worth the expense [...]