After CES 2014, there was a sharp upswing in the number of analysts releasing revised upward forecasts for the wearables sector, none of which appeared to stand up to quick and simple analysis. It was therefore welcome to listen to Paul Lee, Head of TMT Research at Deloitte, accepting that their 2014 forecast for wearables was way out and being revised down. The defense offered was that their forecast “was way out but not as far out as others” is a good reflection on the quality of data available for strategic decision making in the wearables sector at present.
So how is the wearables sector likely to move forward once the necessary forecast readjustments are made?
The answer is likely to be in a chaotic and confused state. The industrial adoption case is likely to take off in an ordered manner, as the use case for hands free productivity drives adoption of Wearables for intelligent delivery of job related information along with un-intrusive monitoring and detection. Whist attracting high Average Selling Prices (ASPs) justified by strong ROI models, this will not drive the unit volume expectations that the Wearables sector has promised.
The consumer sector could drive the volumes, but the Wearables sector is suffering from mass attention and not mass adoption, with the principal participant, the consumer, not yet motivated to pay attention. Until this happens, the tipping point will continue to move.
The mass attention in the industry is motivated by the search for a new solution to drive market excitement as existing products continue their slide into product commoditisation. The principal participants are the semiconductor device manufacturers and the ODMs. To drive volumes, semiconductor manufacturers will create “reference designs” for Wearable devices, which will be quickly taken up by low cost assembly providers. These reference designs will differ only in quick “creative” attempts at product packaging and by squeezing limited additional features out of the design by firmware changes. The result will be an initial surge in shipment volumes of the cheap devices, followed by bad experiences turning off the user market and the low prices forcing the “premium” developers out of the market as their business plans fail to balance. Devices will end up cheap enough to be given away, perhaps fueling the next company branded promotion product.
Does this sound like a cynical doom laden scenario? On its own, probably yes. However a market adoption scenario arising from such a disordered market play out exists. Industry brands attempted to capture the portable music player market, with premium product introductions from Sony, Creative and Archos exploiting the advances in mass storage technologies. These attempts were disordered by the release of low cost poorly packaged players using standard reference designs at around 10% of the cost of the premium brands. These drove volumes, largely due to the rate at which they were discarded as they fell apart in use. They worked, but offered a poor user experience. Product life was extended by including a small screen to offer video file playback, but this only delayed their demise.
Missed at the time was that this was hardware only play. The long term sustainable market growth was driven by the realisation that the experience had to be controlled across the complete system and not the device. iTunes with iTunes Store appeared, and consumers queued to willingly purchase iPod player hardware with lower feature sets and entry price tags at least 10 times higher than the commodity reference design products. The consumer focused only on the overall experience offered, and would not accept any substitutes or hacked together clones as Microsoft found when late joining the party with Zen.
Unfortunately in the short term, the wearables market is likely to follow this model of consumer adoption and market forecasts are likely to continue to overestimate the available prize. The consumer will look for well-designed products with a balanced experience across all the parts of a system and clear relevance. These are likely to be multi-functional, with developed ecosystems to provide the breadth and richness of experience and the necessary stickiness to motivate long term use. The Qualcomm Tricorder challenge is currently underway to find a device that will capable of capturing key health metrics, and is worth $10 million in prizes. The devices are required to be multi-functional and able to accurately diagnose 16 health conditions. The contest has reached the selection stage from 10 finalist teams, of which 2 are UK based. The contest promotion has linked the concept of “healthcare in the palm of your hand” with images of Star Trek devices to spark media imagination.
It is interesting that none of the devices assume any existing packaging format, focusing on function to drive their adoption. Also being multifunctional in their ability to gain data, they provide the richness required to drive the creation of value based service elements into the experience. The potential glitch is how they are able to drive solution adoption within the protracted and regulatory led approach of the healthcare sector.
The route forward for wearables looks to be one of wild over expectations followed by consumer disillusionment. The disruption of volume shipments of cheap hardware will result in a delay to the takeoff of a serious sustainable market in which some clever players may rise to capture significant market shares with cleverly developed end to end consumer propositions.
