Is the smartwatch market tanking or on a long, slow climb?

Two analyst firms are far apart on Apple Watch shipments in Q3

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Analysts disagree drastically over the health of the smartwatch market. Some say the market is tanking. Others say there are favorable signs and predict healthy smartwatch shipments and sales in coming years.

In late October, market research firm IDC said smartwatch shipments in the third quarter declined by 51% from the same quarter of 2015. The total shipped in the third quarter was 2.7 million, IDC said.

By comparison, research firm Canalys on Thursday said smartwatch shipments were up 60% for the third quarter of 2016 compared with the same quarter a year ago. That resulted in 6.1 million units shipped in the latest quarter, Canalys said.

Both companies define a smartwatch as a wearable that has the ability to run third-party apps, but IDC differs from Canalys by saying the third-party apps need to run on the smartwatch itself. As a result, IDC doesn’t include the 1 million Fitbits that Canalys included in its count for the quarter.

Another major difference was how many Apple Watches each analyst firm said were shipped in the latest quarter. IDC said Apple shipped 1.1 million units, a decline of 71%. But Canalys said Apple shipped 2.8 million Apple Watches, nearly three times as many as IDC reported.

Canalys analyst Daniel Matte insisted in an interview that the Apple third quarter number of 2.8 million was "100% accurate" based on multiple sources of information. Even so, he admitted that Apple's 2.8 million watches shipped in the third quarter was a "little less but not wildly out of line" with Apple's shipments for the third quarter of 2015. He wouldn't divulge what Canalys said Apple shipped in the third quarter of 2015 because Canalys had retabulated its early 2015 numbers.

For all of 2015, Canalys said Apple shipped 12 million Apple Watches, which was far below what many analysts and market watchers had predicted. For all of 2016, Canalys predicts Apple will indeed be behind 2015, with 10 million smartwatches shipped.

"The market is very nuanced, and the smartwatch momentum isn't what everybody thought it would be," Matte said. "Our numbers contradict some other analyst numbers out there and are much higher, but we don't think there's a case for thinking the market is nosediving."

IDC analyst Ramon Llamas said in a statement from Oct. 24 that there was a "sharp decline" in smartwatches that "reflects the way platforms and vendors are realigning." Apple didn't ship its second-generation Apple Watch until the end of September, Google has held back on releasing Android Wear 2.0 until next year, and Samsung's Gear S3, announced in September, has yet to be released.

IDC analyst Jitesh Ubrani has repeatedly pointed out over the past year that smartwatches suffer for not having a clear purpose. "Differentiating the experience of a smartwatch from the smartphone will be key," he said in a statement from October.

In July, IDC said the smartphone market declined by 32% in the second quarter of 2016, but the firm also predicted an improvement in 2017 as next-generation smartwatches launch with cellular connections to LTE wireless, instead of via Bluetooth to a smartphone.

At Canalys, Matte said the release of the second-generation Apple Watch models Series 1 and 2 late in September made up the "vast majority" of the 2.8 million units Apple shipped in the third quarter. The Series 2 includes GPS and starts at $369.

With 2.8 million units shipped, Apple was easily the biggest smartphone maker in the third quarter, Canalys said, taking 45% of the market, well ahead of Samsung with 18%, Fitbit with 17%, Garmin with 3% and Pebble with 2%.

The Apple Watch Series 2 GPS with its focus on fitness apps puts it in direct competition with Fitbit, Matte said.

Even though IDC and Canalys differ substantially on third-quarter shipment numbers, the smartwatch market is still nascent. That means that any fluctuations in a single quarter will seem more drastic simply because they are compared to a small market one or two years earlier, analysts noted.

A bigger concern for smartwatches might be where the market will be in two to five years. Samsung executives have openly expressed disappointment in the market, while Apple has been publicly optimistic. Still, both companies seem to rally with new products and new capabilities.

"I'm still bullish in the long term for the smartwatch," Matte said. "How many million sell per year in two or five years nobody can predict."

Matte predicted smartwatch prices will come down in coming years as smartwatches replace the cheaper fitness bands.

"Absolutely, the smartwatch success has not been what most originally wanted, with lower numbers in the early years than anticipated," Matte said. Even Fibit's longtime success was tamped down in the third quarter, he noted.

"While I'm bullish on the smartwatch category, there's some truth to the idea that there's general technology fatigue by buyers," not just for smartwatches, Matte added. "That's more true in China than the U.S. But even with softness in the market, I personally think there's utility with a health device to run apps on the wrist."

Clarification: The story has been changed since it was originally posted to clarify that IDC's definition of a wearable, such as a smartwatch, states the device must be able to run third-party apps, and that the apps must be on the device itself. For this reason, IDC doesn’t include Fitbits in its smartwatch shipment numbers.

Copyright © 2016 IDG Communications, Inc.

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