What Happened to Wearables?

SAN FRANCISCO, United States — It sure felt like a death knell.

For years, chip-maker Intel courted the fashion industry as part of a wider push to make wearable technology a thing. But in July 2017, reports surfaced that the technology giant that makes the chips used in several much-hyped smart devices, from Tag Heuer's smartwatch to Opening Ceremony's MICA smart bracelet, was axing its health wearables division, responsible for devices including fitness trackers. Its New Technology Group, tasked with developing forward-thinking products and concepts, is now refocusing on augmented reality, according to a recent report by CNBC. Intel declined to comment, but sources close to the company confirmed this plan to BoF.

Intel’s shift in strategy reflects a larger crisis facing the wearable tech industry as a whole, which has largely failed to develop products that consumers find attractive. Early entrant Jawbone, which raised more than $900 million over the course of nearly 20 years and was valued at $3.2 billion in 2014, began liquidation proceedings in June. Then there is Fitbit, which raised $730 million when it went public in June 2015. At the time, it was valued at over $4 billion. Today, the maker of activity-trackers, which acquired smartwatch start-up Pebble’s assets in February for $23 million, is valued at just over $1 billion.

Fitbit’s share of the global wearables market dropped to 16 percent in the second quarter of 2017, down from 29 percent during the same period in 2016, according to research firm Strategy Analytics. In the second quarter of 2017, Fitbit shipped 3.7 million wearables, down from 5.7 million in the second quarter of 2016, generating revenues of $353 million, a 40 percent drop from $586 million during the same period last year. It ended the quarter operating at a loss of $63 million, compared to a profit of just under $10 million a year earlier. Fitbit’s challenges are surely linked to increased competition from Apple’s Watch, often used as a fitness band, as well as Xiaomi, which is outpacing competitors in China. There is also simply less demand for Fitbit’s product.

It's all a far cry from 2013, when Credit Suisse issued a report saying the wearable technology market had hit "an inflection point" and would have "a significant and pervasive impact on the economy," reaching $30 to $50 billion over the next three to five years. The previous year, fashion had already jumped on the bandwagon, ushering in what some called "the season of wearables." In September 2012 models wore Google's internet-connected Glass eyewear on Diane Von Furstenberg's runway, where the designer took her bow with co-founder Sergey Brin. In 2014, Tory Burch partnered with Fitbit on an accessories range that could be clipped onto the firm's fitness trackers for a more fashion-forward look. The same year, Samsung's Gear S smartwatch was unveiled on the Diesel Black Gold runway. By 2015, Rebecca Minkoff had debuted her own line of wearable devices. In 2016, American fashion giant Ralph Lauren debuted a smart "PoloTech" compression t-shirt that monitored heart rate, breathing and exertion. But the results of the fashion industry's wearable tech love affair have been questionable to say the least.

Some of these devices are still being made and sold, though most have fallen far to the wayside. The wonky Google Glasses, which quickly earned those gutsy enough to wear them the derogatory nickname “Glasshole,” were removed from the consumer market in 2014. Burch’s accessories are still available via several retailers, but Minkoff’s are nowhere to be found. Neither is Opening Ceremony’s Intel-funded MICA bracelet, which seemed, in any case, more of a marketing play than a serious product.

Apple Watch, the most successful wearable to date — or biggest failure, depending on who you ask — was initially marketed as a tech-savvy fashion accessory, complete with several casing and strap options, one of which was later developed with Hermès. But as Apple’s device has gained market share, it’s become clear that most consumers are not buying it because of the way it looks, but because of its functional use cases: fitness tracking, notifications, time-telling.

A lot of stuff was designed without a great understanding of how it is going to fit into someone's everyday life.

The Apple Watch business is growing. Strategy Analytics says the company shipped 2.8 million devices in the second quarter of 2017, capturing 13 percent of market share globally for wearables. In the second quarter of 2016, it shipped just 1.8 million, accounting for 9 percent of market share. While the number of devices shipped does not indicate actual sales, but instead how many devices were sent to stores (Apple doesn’t break out sales of its watches), chief executive Tim Cook said in early August that sales of the device are up more than 50 percent since last year. In its latest fiscal quarter, Apple’s “other products” category — which includes Apple Watch, Apple TV, Beats electronics, iPods and accessories — generated $2.74 billion in sales, up 23 percent from the same period in 2016.

The next iteration of Apple Watch is rumoured to include LTE support, meaning the wearer will not need to be tethered to a nearby iPhone in order to make calls and use other connected services on the device. For some, it will make the watch more useful, rendering it even more of a computer than a watch. However, it won’t make it more fashionable.

But does a wearable need to be that fashionable in order to be successful? Many argue that compelling functionality comes first.

FUCTIONALITY FIRST

A good-looking ring, necklace or bracelet is just a piece of jewellery if the technology doesn’t deliver on its promise. For instance, the sleek, utilitarian design sensibility of Apple products has been copied the world over, and yet it’s the functionality of the device that fundamentally builds real loyalty.

Across the board, the biggest challenge for wearables — from the Apple Watch to the Fitbit and beyond — is retention rate. “There is a massive drop off in usage over time in a lot of these products,” says Stephanie Palmeri, a partner at Palo Alto, California-based firm SoftTech VC, which was an early investor in Fitbit. “They need to be charged, and the user has to remember to put on the watch, ring or bracelet.” The abandonment rate of smartwatches is 29 percent and 30 percent for fitness trackers, according to a 2016 report from research firm Gartner, which surveyed 9,592 online respondents from Australia, the US and the UK.

“When someone buys a device in the activities-tracker segment, somewhere around 35 percent of those people are no longer using the device after six months or so,” says Weston Henderek, director of connected intelligence at NPD Group. “Those numbers are extraordinarily high.”

The steep drop off is due, in part, to device upgrades. (For example, replacing the first edition of the Apple Watch with the second.) Wearables given as gifts also face higher abandonment rates. “We all know that if you get something like that as a gift, you’re much less likely to stick with it,” Henderek says. “If you’re buying it yourself and you want to use it as part of an exercise programme, you’re probably going to be much more committed to it than if it’s Christmas and your mom gives you a fitness tracker and says, ‘Hey honey, it’s time to get back in shape!’ That might even just make you mad.”

Ringly's smart bracelet | Source: Ringly

Unfortunately, the less-than-addictive data these products generate doesn't keep users engaged, either. "Just because you build technology doesn't mean people really want it," says Charlie O'Donnell, a partner at Brooklyn Bridge Ventures, which invested in wearable tech brand Ringly. A slice of consumers are certainly obsessed with collecting and monitoring their personal data, whether that's steps walked or hours slept. But most are quickly bored with these simple measurements. "A lot of stuff was designed without a great understanding of how it is going to fit into someone's everyday life," O'Donnell adds. "Tracking can become sterile. Once you hit your target weight, it kind of falls off a little bit."

Besides activity tracking, the other major use case for wearables is notifications — i.e., feeling a tap on the Apple Watch when receiving a Slack message, or a vibration on a Ringly bracelet when a spouse calls. But most are clunky.

“When Google first released Android Wear years ago, there was a lot of promise, but a lot of glitches, and Google was very slow to fix those glitches,” Henderek says. “As a result, you had a lot of the vendors pull back from the space and not roll out as many devices or features as aggressively as they might have done.”

Google’s updated version of the software, Android Wear 2.0, began shipping earlier this year after months of delays that forced it to miss the high-volume holiday season. “I think part of it is that Google had some delays, which held back their ecosystem a little bit, compared to Apple which is really just rolling out the Apple Watch and developing [the operating system] exclusively for that device,” Henderek adds.

“With [Android Wear] 2.0, we really focused on a few things: looking at what people already did with their Android Wear watches and making the stuff that they did better and faster,” says David Singleton, VP of engineering at Google and head of Android Wear, citing health-tracking, connectivity and self-expression as the top three things consumers want from a smartwatch. “We also listened very carefully to the feedback we were getting from our partners about some of the things that would help them better represent their products for the user, to represent their own sense of style and elements that were unique to their brand and their customers.”

But while Google may have experienced technical roadblocks, it may succeed in one way Apple has not: Those who wear an Android-powered watch do not need to own an Android-powered phone, whereas the Apple Watch is tethered to the iPhone galaxy. “Until Android Wear 2.0, it was definitely the case that if you had an iPhone we couldn’t do quite as much as we could with an Android phone,” Singleton says. “We have been continuing to work hard to make the product have no gaps in terms of what you can do there between the two. That was definitely a barrier that we were working through.”

Whether or not Android Wear has accomplished that will be determined by the customer. If the wearables market has any chance at prevailing on a grand scale, there must be a larger variety of compelling use cases. “There’s not going to be a single wearable that wins,” Parkes says. “It’s not that we’re looking for the iPhone of wearables. Think about it: There’s not one single winning fashion brand that’s right for every age, every demographic.”

So, what are those use cases beyond activity tracking and notifications?

The global market for medically driven wearable devices — such those that monitor blood sugar levels for diabetics — is expected to grow at a compound annual rate of 27 percent over the next 10 years, according to a 2016 report released by Market Research Future.

One of the biggest challenges is that design can limit the market potential for one item.

FASHION MATTERS

For products worn on the human body, fashion also matters. And the failure of smartwatches to genuinely disrupt the Swiss watch industry is one indication that the wearable tech sector still faces major challenges on the aesthetic front. While the financial woes facing traditional high-end watches — lack of penetration online, a crackdown on gifting in China — have coincided with the rise of the smartwatch, a large percentage of smartwatch sales are actually made by consumers who did not previously wear watches.For wearables makers to truly win market share from the watch industry, they need to make covetable jewellery that conveys personal style and signals social status.

Many would argue that no-one — not Apple, not Fitbit, not other wearable tech devices — has been able to do this. And when one considers the slew of wearables that have placed emphasis on their aesthetic attributes, the success rates are not promising. Lenovo Moto put its smartwatch programme on hold at the end of last year; Apple discontinued the sale of its 18-karat gold Apple Watch Edition, which ranged in price from $10,000 to $17,000. Its second version of the Edition features a ceramic case instead, which tops off at $1,300. Wearable tech startups focused on making fashionable jewellery have also closed on the regular, from San Francisco-based Cuff to Pebble.

Some believe Apple has managed to rise above these challenges. “The thing Apple got right out of the gate was understanding the importance of fashion and luxury for a device worn on the wrist,” says Apple analyst and Above Avalon founder Neil Cybart. “An argument can be made that Watch bands represent Apple Watch's most crucial element because without comfortable and stylish bands, no one would wear the device all day and every day.”

But many in the investment community still haven’t found a mesmerising wearable that gets both form and function right.

“We take a pretty fashion-y view on investing, and we continue not to be sure where wearable tech fits into the fashion spectrum,” says Sam Kaplan, an associate at Burch Creative Capital. So far, the New York-based investment firm, led by fashion entrepreneur Christopher Burch, has stayed clear of the wearables category.

“One of the biggest challenges is that design can limit the market potential for one item,” Palmeri says. “They have to be able to tap into a large enough population that appreciates the style, and will wear the style every day.”

"The Apple Watch has worked for many people, but aesthetically it doesn't appeal to me and it offers more complexity than I need on my body," says Dr. Amanda Parkes, a fashion technologist and chief innovation officer of the Miroslava Duma-founded investment fund Fashion Tech Labs. "There needs to be multiplicities of options."

MARRYING FASHION AND FUNCTION

Ultimately, products that marry style and functionality are most likely to succeed. There is some interesting activity in the wellness space. For instance, Safilo Group SpA, the licensing company that makes eyewear for Dior, Fendi and other luxury brands, has teamed with brain-sensing technology from Toronto-based Interaxon to create sunglasses that measure the wearer’s brainwaves to determine points of focus and help train it for meditation.

Then there’s Ringly. “I want to live in a world where we check our phones less,” says co-founder and chief executive Christina d'Avignon. “Something that has been coming up a lot now is about what phones are actually doing to us. I want to reduce screen time.” The company has also homed in on miniaturisation: making the tech components of Ringly's devices as tiny as possible to enable fewer restrictions on form. While D'Avignon declined to disclose revenue figures, she says that Ringly has grown year-over-year since its first product launch in June 2014.

Levi’s Commuter Trucker jacket with Jacquard by Google | Source: Courtesy

While use cases for wearables are becoming more focused, the forms are becoming freer. No longer does a wearable have to come in the shape of a bracelet or a watch. This presents new opportunities for fashion and accessories designers. Parkes is particularly interested in smart fabric, which could have business-to-business implications that go far beyond the initial offerings presented by Google Jacquard, whose collaboration with Levi's — a smart denim jacket — arrives in stores this autumn.

“Right now, we think of wearable devices as active, things that need to be charged,” Parkes says. “Clothing is passive, there is no maintenance. When that lines starts to blur — say, for example, a fibre battery that is woven in and becomes a fibre circuit that runs itself... that’s when wearables will play a big part in the internet of things.”

Many of the wearables that already exist — in particular, so-called hybrid watches that look like a traditional watch but act like smartwatch — could play a role in that, too. Android Wear, for instance, currently powers the hybrid watches of several major brands including Tag Heuer, Tommy Hilfiger and Michael Kors.

“I think the hybrid watch idea could have a long lifespan,” says Benedict Evans, a partner at Silicon Valley-based venture capital firm Andreessen Horowitz, which invested in Jawbone and Fitbit. “They could still be around in 30 years time.” And brands are betting on this, too. This fall, all new Michael Kors men’s watches shipped to stores will have some sort of smart functionality. (Evans and Parkes also both see opportunities in the ear, with Evans citing Apple AirPods, which launched to consumers in 2017, as a first iteration.)

There is, of course, one big opportunity that some may still balk at: eyewear. While Google Glass failed commercially, “the technology behind it was absolutely amazing feeling,” Parkes says. “There was a marketing problem; early users were not at all fashion or style influencers, and there was definitely a backlash.”

The early success of Snapchat Spectacles, which sold out almost immediately, indicated that consumers were ready to experiment. Today, Google and Apple are both reportedly developing commercial eyewear.

But for now, the wearables market will continue on its quiet period. What role fashion will play in this next wave depends quite a bit on what the industry is willing to put into this research and development phase. “If you think of Gartner’s hype cycle and the trough of disillusionment, we’re sort of in that moment,” Evans says. “We’re working out what the real thing is.”

Additional reporting by Chantal Fernandez.

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