Galaxy Gear Return Rates Shouldn’t Worry Apple, Samsung

Early smartwatch troubles are just growing pains

Galaxy Gear Return Rates Shouldn’t Worry Apple, Samsung

Wearable technology seems poised to take the spotlight from smartphones and tablets as the next wave of must-have consumer tech and the potential driver of a technology profit surge. Or is it?

Samsung (SSNLF) beat archrival Apple (AAPL) to the punch by releasing its Galaxy Gear smartwatch in time for the holidays. But things went off script from there — instead of scooping up early adopters and locking them in, reports are that return rates for the $299 Galaxy Gear have been hitting 30%.

That number indicates an unusually large number of buyers having second thoughts once they strapped their new Galaxy Gear on their wrist. The question is: Should competitors be happy that Samsung whiffed and opened the door for them to come in with a superior product, or does the Galaxy Gear experience indicate the market for a smartwatch is softer than thought?

The answer is important for Apple, sure. But Microsoft (MSFT) and Google (GOOG) are also listening as they continue work on their own versions of the smartwatch.

While the Galaxy Gear is the highest-profile stumble to date, it isn’t the first warning sign that the category might be a tougher nut to crack than expected. Sony’s (SNE) first generation of Android smartwatch was a disaster (Gizmodo’s review was titled “Maybe the Worst Thing Sony Has Ever Made”), and this year’s follow-up has failed to garner attention.

A PCPro article points out one of the biggest challenges facing smartwatch makers: Once people buy a smartwatch, it often fails to meet expectations and gets shoved in a drawer — in fact, most of the smartwatch owners surveyed had stopped using them. Given the warning signs, there’s concern that smartwatches could turn into a high tech boondoggle, a feature that sounds cool but falls flat and fails to gain consumer acceptance … think 3D TVs.

However, I still believe smartwatches have significant potential, especially for Apple.

Despite the less-than-stellar results seen by Sony and Samsung, the smartwatch — done right — could well be the next runaway consumer technology hit. The Pebble smartwatch, a Kickstarter record breaker last year and CES star in January, has notched up a total of 275,000 pre-orders and continues to be in demand, even now that it’s facing competition from giants like Samsung.

Meanwhile, a BI Intelligence report notes that roughly 55% of the global population currently wears a watch,  and if only a small fraction of those can be convinced to upgrade to a smartwatch, the potential market could easily become one worth more than $9 billion yearly by 2018. Others are even more optimistic. Industry analysts have Apple shipping anywhere from 5 million to 63 million “iWatches” in the first year of release. That’s a huge range, but even the low end would represent a significant new product category for the company — one with plenty of room for growth and the opportunity to bolster iPhone and iPad sales.

I see the current smartwatch market as being somewhat analogous to where MP3 players were in 2001: It was a consumer electronics category creating buzz, with a growing number of manufacturers who tried, but failed to take a dominant role … until Apple came along, nailed the design with the iPod and destroyed the competition.

The differences this time around are that the smartwatch (at least so far) is not a standalone gadget, but a companion to an existing device — the smartphone. Apple is a big player in the smartphone market, but the vast majority of consumers are carrying Android devices so the opportunity for market ownership isn’t there.

And Apple isn’t alone as a leading high-tech company interested in smartwatches. Sony and Samsung are already in the thick of things and it faces a formidable competitor this time in Google, which is increasingly throwing its weight around in hardware design.

There’s also Microsoft, but I wouldn’t worry too much about Windows raining on Apple’s smartwatch parade. Microsoft’s Zune and Surface RT are prime examples of why Apple needn’t overly concern itself too much on what Redmond is up to. Windows Phone 8’s single-digit market share is the other reason — unless Microsoft comes up with a platform agnostic smartwatch, even a wildly innovative Windows offering would only appeal to 4% of smartphone owners.

I expect that someone (most likely Apple, thanks to its consumer status and early adopter appeal) will release the smartwatch that becomes a must-have device in 2014 and kickstarts the category into high gear. Over time, we’ll likely see a smartwatch market that mirrors the current smartphone landscape. Apple will own a good-sized chunk of it and charge a premium for an iWatch that brings in high profit margins — Android competitors will have the overall numbers while struggling to make money.

As for Samsung, the Galaxy Gear is just the first step. The return rates are a bit alarming, but just like the company did with smartphones, I think Samsung will eventually get this right.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/11/apple-worried-galaxy-gear-return-rates/.

©2014 InvestorPlace Media, LLC

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