So, I recently read a piece by Nicholas Foulkes in the FT – in which he interviews Frederic Arnault, Strategy and Digital Director for Tag Heuer. The article basically just highlighted the opportunities that the luxury sector could play in connected devices and that they could provide more competitiveness in that sector. It was a short piece, but I could not help looking at the headline statement ‘Luxury smartwatches are worth the investment’ and thinking “Meeeehhh, this ain’t it”
You purchase a luxury smartwatch for virtually one reason only: to be able to wear a premium brand on your wrist and check your email notifications at the same time. That’s pretty much it.
The term “investment” suggests expecting some kind of future benefit and I don’t think that the idea of luxury smartwatches actually offers any significant value proposition to meet that criteria.
Does the average smartwatch wearer want to spend over $1000 on a timepiece?
A figure quoted by Frederic Arnault was that somewhere around a quarter of 15-35-year olds wear a smartwatch in the US, which was the basis of arguing that smartwatches have a high market penetration and therefore there is room to grow. My question would be how much of that ownership results in retention and what price points those watches are being bought at. In my personal experience, the actual role of a smartwatch has been relegated to a glorified step-counter, and the ones being worn by most people cost just over a hundred dollars. The most notable of which is the fitbit, seen on the wrist of many office workers and almost never used to actually tell the time. The Apple watch only costs a few hundred dollars and that’s still very expensive for most people looking to purchase a smartwatch. I wonder just how much growth is actually possible for the luxury sector.
The tech industry is too restless. The watch industry is too laid back
Back in 2015, Apple launched their top-end watch that went up to US$17,000 and Samsung had a short stint with de Grisogono and produced a custom gear S3 which was US$15,000. The reality was that customers could not see a value proposition with owning such products. Both examples failed within a short period of launch and the lesson tech pundits had to offer was that if a company on the scale of cultural influence as Apple could not break into the oligopoly that is the Swiss watch industry, then no other tech company will have the muscle power to do so. As it stands, both examples are defunct products that are only worth as much as the precious metals and gemstones that they hold.
I asked this question to Søren Jenry Petersen, former senior executive at Nokia, co-founder of luxury phone company Vertu (before private equity took over) and current CEO of Urban Jürgensen. He explained the core principle:
“The Iron rule of that industry is this: Advanced New Stuff is very interesting, sexy and very expensive. New Stuff is interesting, and you can probably afford it. Slightly New Stuff is not interesting and it’s cheap. And the stuff from a couple years ago is worthless”
The way I look at it is that the tech industry by its very nature is built on the grounds of obsolesce. There is a need to push out a new product every year and something barely over 12 months old is pushed to the sidelines. There is always a consumer drive to purchase the latest thing. Every year there is a new Thousand-dollar iPhone with the latest specs to stay relevant and every year there are millions of people buying them. Spending five figures on a product that loses its relevancy by the next year is just unappealing to even the vainest of consumers.
Let us look at Vertu as a tragic example of mixing luxury and tech. When they first started, the brand had a lot of promise: exclusive high-end mobile devices that were made of the best materials and had a button for a concierge service. The brand then was bought out by a private equity firm who removed the concierge service during the era of smartphones moving full steam ahead. The phones lost their core exclusive feature with their concierge service and they simply could not keep up with the advances in hardware and software. Why spend $10,000 on an outdated feature phone when you can buy the latest iPhone or Samsung which have great software, performance and cameras and then just subscribe to a concierge service?
Trying to stay relevant and exclusive
The hurdle of relevance is faced by the likes of LVMH and Richemont. Both were wise enough to use their entry level subsidiaries such as Tag Heuer and Montblanc and the watches produced in the luxury category tend to be at a low four-figure price point. Had labels such as Zenith or Vacheron Constantin been used, it would have been an instant death for the brands.
For the premium prices paid for such pieces (for any brand) you would expect the top shelf components and the best features. And this is where the luxury sector is lacking. It took three generations for Tag Heuer to finally add a heart-rate sensor to their connected watch, and it still doesn’t have cellular connectivity. Montblanc’s original summit watch didn’t have GPS for workouts or NFC for payments.
Then there’s knowing the quality behind the hardware. It’s hard to find comfort in knowing that the majority of components are third party and produced in a factory alongside multiple other cheaper watch brands. The exclusivity found in a mechanical watch movement or dial through craftsmanship is thrown out of the window. The internals of most current smartwatches are powered by the Snapdragon 3100 SoC (System on Chip, which houses the CPU and connectivity of the device). The problem is that the snapdragon 3100 is two years old and is based on a five-year old architecture – luxury smartwatch brands simply can’t keep up with innovations in tech. There will always be a new generation of lithium cells and connectivity standards. How do LVMH and Richemont think that a one day battery life is something to brag over?
Competitors such as Apple and Samsung produce devices that cost less but have the latest hardware because they’re able to produce in-house (Apple has their S5 chipset and Samsung has Exynos). Ironically, a Samsung Galaxy watch is arguably more exclusive than anything from Swiss luxury labels.
Unlike a watch movement, where stating that a certain model has been around for a few years, therefore is a sign of tried and tested quality, outdated internals of a smartwatch just show poor value. And Qualcomm – the world’s largest mobile chipset maker isn’t exactly rushing to produce new models of SoCs for wearables (Mobile phones are where you actually invest resources in). The market was so bad that even intel ended up quitting the game altogether.
Further to the idea of exclusivity, is the software experience. Luxury has a core element of convenience and comfort. Most watches use Google’s WearOS – so the experience of using a smartwatch is effectively determined by Google; in terms of app functions, security features and connectivity between devices. Smartwatch companies are at the mercy of third-party vendors in terms of keeping up: last year’s hardware and features are junk because they’re not compatible with this year’s software. A buggy software experience for the current generation is just as worse.
There will be a small minority of wealthy clients who will buy a luxury smartwatch no matter what. But the reality is that in order to make any actual viable profit, you’ll have to sell to the masses (middle income) who won’t have the patience to keep up with planned obsolescence. Luxury watch labels will have to skimp out on hardware to save costs because the margins will be extremely tight.
What about hybrids?
This is a point raised by many proponents of luxury smartwatches. The idea is to have a traditional mechanical watch that also implements “smart” features. The example I can think of is the Frederique Constant Hybrid Manufacture. It combines an mechanical watch movement and a battery powered module that houses features such as sleep tracking and activity tracking. This is all done in tune with a phone app.
But here’s the thing once again: the tech obsolescence is still there. Whilst a mechanical watch can be serviced, the electrical components are vulnerable. And the longevity and usefulness of all those features are only worth as much as the actual watch company offering software support. I’ve spoken to 4 retailers and they’ve all confirmed that the piece is a nightmare to stock because customers keep coming back to complain. Look at the below complaints from google:
The idea of a hybrid smart watch appeals only to those who are emotionally struck by the idea that there’s no unwinding mainspring or “heartbeat” of a balance wheel in a normal smartwatch.
You might purchase a hybrid watch and expect it to last a lifetime. But you know what you’re likely to purchase on a yearly basis? A new smartphone – introducing a new bucket of compatibility issues. And it’s the obsolescence argument all over again.
To conclude: Luxury smartwatches aren’t worth the investment. A luxury smartwatch is simply a tiny niche that even the actual manufacturers themselves aren’t even seriously investing in. An object in which its very nature is to become obsolescent and irrelevant in the future, cannot be called an investment.