The Next Big Thing - Wearables Are In Fashion
Posted: Jul 30, 2013
■ Bottom Line: Jointly the Credit Suisse TMT and Retail Teams conclude that we are at a potential inflection point in market adoption for wearable technology driven by: (1) a growing installed base of Smartphones, (2) component cost/performance improvements, (3) an established software ecosystem and (4) new apps/business models. Wearables are rapidly evolving from single function, hard to connect, dumb devices, to what we believe will increasingly become multifunction, always-connected, smart/aware devices. We estimate a potential ten-fold increase in TAM over the next 3-5 years from $3-5bn to $30-50bn – still only 6% of total CE spend and only a 15% attach rate to the Smartphone installed base. Wearables will have a significant and pervasive impact on the economy in coming years – profoundly altering how we interact with our technology, our environment and each other; providing context to location, and evolving the Big Data paradigm from the unstructured to what has been to date, uncollected data. While early, it’s a Mega-Trend with far reaching implications.
■ Technology – AAPL, GOOG, and BRCM in the Pole Position. The dominant installed base of Android/iOS place GOOG/AAPL in the pole position to leverage this new opportunity. We estimate that an AAPL iWatch could generate $10bn/$3.30 rev/EPS assuming 25% attach rates at a $250
ASP, and BRCM’s strength in Connectivity/GPS could drive 30% share of Wearable Semi content, and $2bn/$0.70+ in rev/EPS. While trends are still early – we have identified three clear winners: AAPL, GOOG and BRCM.
■ Retail Impact – Nike, Adidas, Under Armour Early with Customer
Engagements. Apparel has been an earlier adopter of Wearable technology
– first in the form of the wristwatch, but more recently with fitness monitors like the Fuelband and FitBit. The primary purpose to date has been to increase customer engagement with athletic/fitness brands with the potential to begin to cannibalize the $56bn watch market. We would highlight Nike, Adidas and Under Armour as early adopters who have leveraged Wearables to enhance the fitness experience/efficacy of their product.
■ Internet Impact – More Touch Points For Content and Services. For internet providers, Wearables increase the number of channels through which providers can deliver content/services, provide a more granular profile of the user, and offer the ability to more seamlessly integrate their services in the normal flow of the users daily activity. We highlight Google Now, Yelp Monocle, and eBay Milo as use cases that would significantly benefit from a proliferation of the Wearables market.
■ Key Conclusions: A rapidly growing installed base of mobile computing devices and a confluence of hardware/component innovation, software ecosystem maturation and emerging business models should drive significant growth in “Wearables” (smart watches, glasses, monitors etc.) over the next several years from an estimated $3-5bn in 2013 to what could be well over $42bn in the next 3-5 years – assuming 15%/25% attach rates to Smartphone installed base/shipments and $100 ASPs; this would represent 6% our expected CE spend. While it is still too early to assess how much of the spend on “Wearables” will be incremental versus cannibalistic, the Credit Suisse TMT and Retail Research Teams have identified the following key trends: (1) Hardware/component innovation: Low power connectivity and processing, sensors, and touch and voice interfaces could represent a greater than $5-8bn semi TAM over time, (2) Software Ecosystem: The dominance of Android and iOS place GOOG and AAPL in the pole position to leverage this new opportunity – for example we estimate that an AAPL iWatch could generate $10bn/$3.30 rev/EPS assuming 25% attach rates at a $250 ASP, (3) Business Model Leverage: Multiple permutations including deeper customer engagement (Nike, Under Armour), new applications, mobile payments, medical monitoring, e-commerce, location based service and big data evolution from unstructured to un-captured data. Wearables will have the potential to add context to location – greatly deepening our understanding of how we interact with our surroundings. While trends are still early – we have identified three clear winners: AAPL, GOOG and BRCM.
■ Why Now: Right Time, Right Place. Wearables are not new – they can trace their history back to the 15th Century when Peter Henlein first crafted ornamental time pieces worn as pendants. Five hundred years later, in 1968, the Hamilton Watch Company designed the first digital watch for Stanley Kubrick’s “2001: A Space Odyssey” and in 1975 both Hamilton and Hewlett Packard introduced the first calculator watches. Over the last decade, incremental functionality has been added including altimeters, thermometers, barometers, pulse and head-mounted displays mainly for the enthusiast market. We currently count over 50+ “Wearables” in the market today including products from Nike, Jawbone, Motorola, Sony, BodyMedia, FitBit, GoPro, and others. We see an extremely fertile environment for a significant leap in “Wearables” over the next several years from what has been limited function/connectivity, to what is going to be truly smart/aware devices with ubiquitous connectivity. The foundation of this Wearables revolution is the rapidly growing installed base of Smartphones (from 1.1bn to >3.0bn units in 3-5 years) combined with significant improvements in low power connectivity, sensors, battery life, interfaces and displays. Along with Google Glass and the much rumored AAPL iWatch, we see multiple entrants including: Samsung, LG, Metawatch, Misfit, Martian, Allerta, I’m Spa and CooKoo, among others.
■ Sizing the Opportunity – It’s Bigger than You Think. The Consumer Electronics market is approximately $690bn, of which compute (PCs, Tablets, Smartphones) is approximately $380bn. Looking at markets tangential to Wearables, the current watch market is approximately $56bn, while the current market for sunglasses is $20bn. Looking at the CE Wearables market to date, we estimate that Nike has sold between 1-2 mm FuelBands and we estimate the entire fitness/health Wearables market to be between approximately $2-3bn. Sizing the Wearables market over the next 3-5 years is not easy – new applications/functionality or business models are as likely to push attach rates up, and disappointing applications are likely to drive attach rates down – of note we estimate that BT headsets have less than a 15% attach rate to handset shipments. Our methodology in estimating the size of the market assumes attach rates around Smartphone installed base/shipments and corresponding ASPs – reflecting our view that Smartphones will become the “personal cloud” for Wearables compute, dictated by size constraints on battery life – hence our view that low power connectivity is a key enabling technology for the Wearables market. Our analysis suggests that a 15%/25% attach rates of Wearables to Smartphone installed base/shipments would yield a $42.5bn TAM over the next 3-5 years. Further, assuming that semiconductors tend to represent 18-22% of BOM in CE devices, would generate a chip market that could be $5bn-$8bn TAM.
■ Retail and Internet – Wearables Increasing Engagement. Apparel has been an early adopter of Wearable technology – first in the form of the wristwatch, but more recently with fitness monitors like the Fuelband and FitBit. The primary purpose to date has been to increase customer engagement with athletic/fitness brands with the potential to begin to cannibalize the $56bn watch market. We would highlight Nike, Adidas and Under Armour as early adopters who have leveraged Wearables to enhance the fitness experience/efficacy of their product. For internet providers, Wearables increase the number of channels through which providers can deliver content and services. While not unlike the mobile experience, Wearables also provide an incrementally more granular profile of the user and offers the ability to more seamlessly integrate services in the normal flow of the users daily activity. We would highlight Google Now, Yelp Monocle, and eBay Milo as use cases that would significantly benefit from a proliferation of the Wearables market.
■ A Brave New World – Adding Context to Location. While it is unlikely that the Wearables market will move the dial in the next 6 months, our TMT and Retail Research Teams see the potential for a sizable and consequential market over the next 3-5 years. The unintended consequences or yet-to-be envisioned opportunities are perhaps even more exciting than the tangible, easy to define opportunities. While we live in a more connected world today than we did yesterday, connectivity is still mainly one dimensional – it has the ability to say where the user is, but not what the user is doing – the next wave of Wearables will be able to add context to location – providing a deeper understanding of how we interact with our surroundings. In addition, we see a significant broadening of the sphere of influence Wearables could have on the economy – take for example the health potential for the Wearables market or insurance implications (i.e. Progressive Snapshot Discount) or mobile payments as a few incremental examples. Wearables could also provide the backbone for the next evolution of Big Data Analytics from unstructured data to un-captured data. It was not the intent of this report to explore all the facets of this market, as much as lay a foundation for future discussion. As Bill Gates once said – “We tend to overestimate the next three years, and underestimate the next five.”