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It's Smart and It's a Watch. Is It Though?

It is sometimes interesting to consider how products are named. Pepsi was invented by a doctor who found the name for his soda within the word "dyspepsia," the medical term for indigestion. Maybe that is why doctors rarely run marketing departments. Naming a beverage after an illness is not typical of brand campaign whiteboarding sessions.

In any event, we now have a product line called "smart watches." It has a nice ring to it. You are smart because you wear it, it seems to say. Or the product is smart and who doesn't want to buy some smart and strap it on their arm? But from an economics perspective the term "smart watch" is pretty misleading.


There are a variety of circumstances where defining the boundaries of a market is very important. Companies will want to know who they compete with in their market. Government regulators often need to identify markets geographically or by product characteristics in order to determine if a merger could create harm through greater market power. If a market is improperly defined then a company may with the wrong enterprises or miss a competitor. The government may object to mergers which would have benefited consumers or permit a merger which is harmful.

In the case of horology there are many reasons to believe that smart watches are not actually part of the watch market, I will offer them here.

Most products are actually a bundle of characteristics. A home is someplace with rooms but it is also a neighborhood and school district, for example. There is an entire methodology in economics, called hedonic pricing, which attempts to place a value on the unique characteristics of products. A lot of things we buy are fairly complicated combinations of different features and watches follow this pattern. I'll here outline the feature sets of traditional and smart watches and we'll see that the actual overlap is really not that significant.


Traditional Watch Smart Watch
Worn on Wrist Worn on Wrist
Tells Time Tells Time
Interchangeable Straps Interchangeable Straps
Mechanical or Quartz Powered Software License (not ownership)
Independent Disposable
Status symbol Rapid Depreciation 
Closed feature set Transmits Information
Purpose built Multiple Communication Channels
Liquid asset App Ecosystem
Heirloom - (for Mechanical possibly Quartz) Networked
Collectible Rechargeable Battery Powered
Serviceable Closed Platform
Analogue (Mechanical or Quartz) Limited Points of Service
Complement Independent Non-specialized
Durable Planned Obsolescence (end of support)
Open Platform Innovative Potential
Servicing Ecosystem Health Tracking
  Mobile Payments
  Complement Dependent
  Fosters lock-in

A simple Venn diagram illustrates just how little traditional watches have in common with smart watches. The overlap in my list is only three items: telling time, worn on the wrist, and changeable straps. Traditional and smart watches have far more distinct features than common features.

I'll now describe some of the more nuanced features of traditional watches. Most are fairly well-known but they offer a stark contrast to smart watches. The status symbol and liquidity properties of luxury watches are fleshed out in some of my other articles so I won't spend further time on those. Given the price range for smart watches (comparatively low) we can conclude that they really do not offer status or liquidity.

The functionality of a traditional watch is guaranteed either by a quartz battery or a wound spring. At a minimum these sources of energy will last roughly 40 hours without any human intervention (the power reserve for a basic ETA 2801-2 manual wind movement). Mechanical watches could, in theory, run for as long as the owner lives provided she moves enough (automatic wind) or is attentive enough to winding the watch on a regular basis.

Let's contrast this with smart watches. Almost all smart watches are powered by a rechargeable lithium ion battery. The Apple Watch battery is rated for an 18 hour charge. This is much shorter than typical quartz batteries or the minimum power reserve in a mechanical watch. And in order to recharge a smart watch once it is depleted you need to 1) have access to a power source and 2) wait a comparatively long time for a decent charge (2.5 hours to 100% for the Apple Watch). For these reasons the wearer has less independence. And rechargeable lithium ion batteries do not last forever. Their capacity declines each time the charge cycles from empty to full and back again.

Estimates are that after 2.5-3 years an Apple Watch battery will need replacement for an out-of-warranty cost of $79. Mechanical watch barrels last much longer than this and a quartz battery replacement is not nearly as expensive. Consumers might also increasingly suffer from plug-in fatigue: charging a laptop and a phone and a car and a watch, for example, may just be more than certain consumers are willing to deal with. Traditional watches can help avoid such fatigue.

A traditional watch is both open and closed. It is an open platform in the sense that anyone can repair or service it. There are strategies manufacturers sometimes take, such as designing case backs which require a specialized wrench, which can make it more difficult to work on a watch. But tools are fairly widely available and given the proper training any watchmaker can work on any given watch. Traditional watches are also closed in the sense that they do not gather information from the owner and re-transmit it.

With respect to these features smart watches are a mirror image. Smart watches are also both open and closed but in exactly a reverse manner. Many smart watches are closed in that they can only be repaired or serviced by the original manufacturer. They require highly specialized tools and processes. Apple has only recently begun "verifying" certain repair businesses and the company has a history of disabling functionality if repairs are not conducted through official channels (the so-called "error 53" outcome). And the owner of a smart watch doesn't really own all of the watch. The software on a smart watch is typically licensed to the watch buyer under certain terms and conditions (typically referred to as an End User License Agreement, the most recent for an Apple Watch is 387 pages in length). This limits what the watch buyer can do with the watch software. Further, Apple Watch bands are not interchangeable with the standard attachment mechanism used by the strap industry (spring bars). This is another dimensions along which smart watch hardware is closed.

Smart watches are open, though, in that they collect a significant amount of information from owners, include voice, health (biometric) and location while transmitting this information elsewhere. This has resulted in significant privacy problems. This past summer Apple disabled the Apple Watch "walkie talkie" feature because a bug allowed for monitoring of iPhone microphones by hackers.
A Homebrew SCIF
The Strava app available on Fitbits and other devices created maps online as wearers were jogging and walking. This revealed the location of secret military bases in Afghanistan and elsewhere when service members were using the app. An Omega Speedmaster would not create such a problem and would be allowed in a SCIF (SCIF = sensitive compartmented information facility, ie a cone of silence for top secret stuff) but an Apple Watch would not (for more information visit here).

Traditional and smart watches also differ in their durability. Consumer electronics are notoriously unreliable over long periods of time. At least two class action lawsuits have been filed over allegations that Apple Watch batteries swell causing the screen to crack (the image below is taken from one such lawsuit).
Over time, with the rapid pace of innovation, technology companies frequently abandon older releases of software and hardware. It is highly unlikely that the buyer of a 2019 Fitbit Ionic will plan to hand it down to his son or daughter after the passage of 20 years. In contrast, watches from the 1960s are still highly sought after and valuable in the vintage market almost six decades later. With effective service they can maintain almost perfect functionality.

The comparatively rapid physical depreciation of smart watches is reflected in the rate of lost monetary value when the watch is purchased and the shrink wrap is removed. Currently, according to data from eBay, a pre-owned Apple Watch 4 LTE is selling for approximately $280. The same watch retailed for $499 new almost one year ago implying a 44% rate of value depreciation annually. In contrast, a Tudor North Flag retailed new for $3675 in 2015. Current eBay sales of preowned versions have an average price of approximately $2370 implying an annual value depreciation rate of approximately 10.5%. This is a significant difference.

There is a tendency to believe that the information offered by a smart watch is a superset of the information offered by a traditional watch. Most would be hard pressed to find a function in a traditional watch which could not be replicated by an app on a smart watch. And there are certainly functions in smart watches, such as GPS, which have never been offered on traditional watches. In this sense the smart watch is properly described as a "jack of all trades." Think of a complication on a traditional watch, such as an alarm or a date or a chronograph, and such a complication could easily be duplicated on a smart watch.

But, as the saying goes, a jack of all trade is the master of none. While a smart watch may use its speaker to replicate the function of a minute repeater (a complication which indicates the time audibly) I believe most people would prefer the analogue timbre of a hammer (34a in attached Zenith patent diagram EP1708050A1, European Patent Office) striking a gong (32b in diagram) in a mechanical movement.
Zenith Minute Repeater Patent EP1708050A1, European Patent Office
You may judge for yourself here
. And there is growing appreciation for such differences, forecasts predict that in the near future revenues from vinyl records will soon outstrip revenue from CD sales.

It is fair to say that most traditional watches are designed to master one thing well. They are typically purpose built. There are a very wide array of traditional watch styles: formal / professional, sport (diving, yachting, etc), chronographs (to time events), aviation, and field watches just to name a few. In contrast, the form factor of smart watches is very constrained and typically attempts to conform to either a sport or more generic styling.

Because they are mass produced, presumably in a highly automated process, and unique functionality is offered in software rather than hardware, smart watches simply can not offer the niche functionality that a traditional watch will. A 53 inch flieger watch offers a level of readability which can not be replicated by a 44 mm Apple Watch. The Rolex Deepsea is rated to 2.4 miles underwater and includes a helium escape valve for saturation diving (helium can get into waterproof watches because the molecules are small and if it expands inside a case the watch will have a failure). At a few dozen feet past .03 miles of depth a Garmin Vivoactive 3 will probably fail. Neoprene wet suit gloves are not conductive so a cold water diver would not be able to start a timer on a smart watch. In contrast, rotating bezels are designed to act as a "stopwatch" quite well when a diver has slippery gloved hands. The examples are many.

Take It to the Data

Perhaps the most compelling evidence that smart and traditional markets operate in two different market segments comes from sales data. Here I offer a graph plotting Swiss mechanical watch exports on the vertical axis (measured in PPP adjusted dollars) and total sales of smart watches and fitness wearables.
There is not a lot of data to work with simply because smart watches are so new. But the data we have shows a positive relationship between the two sales outcomes. The fit of the line is surprisingly good (smart watch sales can explain almost 60% of the fluctuation in mechanical Swiss exports).

The trendline indicates that for every $1 increase in spending on smart watches we should expect an 84 cent increase in mechanical Swiss watch exports. This means that smart watches do not represent the "business stealing" threat which impacted the watch industry during the quartz crisis. Instead, they represent a "market expanding" where those inclined to buy a smart watch will perhaps include it as part of a collection which includes traditional watches.
General Schwartzkopf illustrates Schwartkopfing
This is entirely consistent with the recent trend towards "Schwartkopfing," or wearing a smart watch on one wrist and a traditional watch on another, so named after General Norman Schwartkopf. He was famous for wearing a Seiko dive watch on one wrist, set to Eastern Standard time, and a Rolex on the other, set to Saudi time.


Conclusion - If It Walks Like a Phone and Quacks Like a Phone, It's a Phone

Smart watches really do not mimic much of what makes a high quality watch a watch. Smart watches are both more and less than traditional watches. The name "smart watch" actually seems to be a misnomer, it would be more accurate to call these devices "dumb phones." They typically employ an operating system which is similar to a phone OS, a touch screen which is similar but smaller than smart phone screens, similar but less storage, similar but smaller battery, similar but more limited wireless connectivity and a similar app ecosystem. In fact, smart watches tend to discourage consumers from trying other smart phone platforms since they are typically highly integrated with a phone OS. An Apple Watch does not effectively inter-operate with Android so once you buy an Apple Watch it is far less likely you will switch from the iPhone.

Regardless, smart watches do offer certain functional flexibility in software which mechanical watches strain to achieve. But at least one horology shop is trying. The Ressence E-crown, which allows a smart phone to interact and control a mechanical watch, is a fascinating hybrid approach. Given time such innovation may arrive at the point where there is a timepiece which offers the union of smart and traditional watch functionality. But we're definitely not there yet.

Comments

  1. Wow, such a waste of time.
    Currently the only important difference to me is the available watch face. When Smart watches have decently incorporated display tech to traditional analogue faces (WITHOUT the damn ugly date windows that can't tell if it's 31st or 1st) then I'll wear one.
    RIght now I wear a Casio with a digital date window and a virtually eternal Solar power reserve..

    Now that's smart, but it doesn't correct itself via bluetooth which is sad.

    ReplyDelete

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