This Tuesday, Sony (NYSE: SNE) launched its SmartWatch 2, the company's second attempt at a wrist-mounted device capable of running apps and controlling the wearer's mobile phone.
The $200 watch can either be paired with Android smartphones or used as a standalone timepiece. Like other smartwatches, such as those from LG (KSE: 066570) and Samsung (PK: SSNLF), this device is simply a smartphone accessory – however, there are big things brewing in this space.
Despite countless failed attempts, analysts are predicting a smartwatch explosion. Canalys expects smartwatch sales – which amounted to fewer than 500,000 units in 2012 – to exceed 5 million by 2014.
The predicted compound annual growth rate for smartwatches ranges between 195 percent and 900 percent. Analysts predict the wearable technology industry to grow to more than $18 billion by 2016.
The smartwatch space is filled with early competitors besides major players like Sony, LG and Samsung. The Fitbit Force, Pebble Smartwatch, and TomTom GPS Sport Watch, all offer interested consumers a different computer they can wear on their wrist.
But these devices aren't driving analysts to make such big growth predictions... Instead, the fact that neither Apple (NASDAQ: AAPL) nor Google (NASDAQ: GOOG) have debuted their own smartwatches is the major reason for this healthy speculation.
The Elephants in the Room: Google
Let's start with Google. The search company has the mobile operating system game locked down with Android, which now claims 80 percent of the global smartphone market by shipment– it has scored major innovation points with Google Glass, and it has some big hitters on its side in the smartwatch game.
First, Google owns smartphone maker Motorola, which first released a smartwatch three years ago called the MOTOACTV. The company also owns a patent for waking up smartwatches with a glance. Though its early designs are negligible, Motorola's intellectual property in this matter is important.
Second, Google also owns WIMM Labs, a startup that designed a one inch Android-powered touchscreen platform that could be designed into watches, jewelry, or other wearable units.
I was one of the first people outside of WIMM to handle these pre-Google smartwatches more than two years ago, and I still have it sitting in my desk drawer at home. Truth be told, it wasn't all that spectacular in execution, but it was the idea behind the platform that really showed its value.
Google is expected to release its first real smartwatch very soon – and a well-executed, affordable device may finally be able to kickstart the smartwatch business.
The Elephants in the Room: Apple
It wouldn't be a stretch to say the 2010 iPod Nano was Apple's first smartwatch. The little square touchscreen was designed to be wearable, and third-party manufacturers made watchbands for it. With barely any modification, the iPod could easily become a workout watch, or an all-purpose timepiece.
Thanks to Apple's recent hire of former Burberry CEO Angela Ahrendts, and former Yves-Saint Laurent CEO Paul Deneve, rumors of Apple wearable tech has kicked into high gear.
Of Ahrendts, Apple CEO Tim Cook said: "She shares our values and our focus on innovation, and she places the same strong emphasis as we do on the customer experience."
With a fashion-heavy executive lineup, a trademark on the iWatch name, and rumblings from Apple's supply chain, the rumors are that an Apple smartwatch could hit the market as early as next year.
Will these things actually take off?
Smartwatch market health is partially contingent upon their ability to break out of their niche as a smartphone accessory.
The demand for traditional wristwatches has fluctuated with fashion. In 2006, for example, the sales of men's watches was in decline. Thanks to a surge in popularity of wrist candy with huge 50mm faces, though, the industry has managed to grow.
But smartwatches aren't just about fashion or simple timekeeping. They're about enhancing our mobile computing experience, or perhaps even becoming the experience.
A primary benefit of smartwatches is that they eliminate the need to pull out our phones as much as we do. If we have an incoming call, message, or appointment alert, we can just glance at our wrists. Unfortunately, this convenience comes at a premium, and these devices often cost as much as the smartphone they're enhancing.
The fact is, smartwatches either have to be standalone devices at standalone prices, or accessories at accessory prices.
Where to invest, even if they don't take off
While they exhibit many similarities to smartphones, smartwatches have special demands that slightly change where investment is wisest.
Because of their small size and need for all-day functionality, smartwatch makers have invested in alternative display technologies, such as e-paper and TFT panels. These might not be as bright as a smartphone screen, but they can be viewed perfectly in bright light situations and do not consume a lot of energy. Curved and flexible displays, meanwhile, are also in demand for their ability to match the contour of the human body.
Smartwatches typically utilize one or more short-range communications protocols to pair them with smartphones such as Bluetooth or RFID. Companies that make small, energy-sipping wireless radios will be in demand.
Bluetooth leader Broadcom (NASDAQ: BRCM) is an obvious choice, but I've personally invested in former Phillips subsidiary NXP Semiconductors (NASDAQ: NXPI) for its work in RFID tech commonly found in EZ-Pass tags.
A primary area of difference between watch and phone is in the sensor department. Smartphones all utilize image sensors for their cameras and velocity sensors for screen orientation, but outside of the latest trend of fingerprint scanners, few smartphones contain biometric sensors.
Because of their place against the skin, smartwatches could be used to track heartrate, body temperature, or other electrical impulses. The Nike Fuelband, Fitbit Force, and Jawbone Up all utilize biometric sensors already.
This is one of the big areas that warrants a second look, and industry groups like the FIDO alliance are pushing for biometric authentication to become standards above and beyond password verification.
Even if the smartwatch craze doesn't materialize, these are the areas where innovation is already being driven.