Apple: destroyer of fragmentation

on March 28, 2014

With the release of Android Wear, we now have a pretty good idea of how Google intends to target the smart-watch space, and it’s very much about extending a subset of smartphone functionality to peripheral devices. Although today these new devices will offer a very thin layer on top of the smartphone, it’s easy to see in time they could subsume more and more of the functions of the smartphone and eventually act independently with their own cellular connectivity. As such, Android Wear can be seen as positioning Google for a future beyond the smartphone.

We don’t know yet what Apple has planned for wearables, but from the rumors around Healthbook, it certainly looks likely it will be taking almost the opposite approach – namely, adding value to the smartphone experience through peripheral devices. You can think of Google’s approach with Android Wear as being “smartphone-out” – i.e. extending smartphone functionality out to wearables, and Apple’s rumored approach as “wearables-in” – i.e. using wearables to add functionality to the smartphone. This makes good strategic sense for each company – Google’s interests are best served by extending its services to all possible categories of devices, while Apple’s are best served by making its devices in key categories as compelling as possible.

Wearables - Apple vs GoogleOpportunities in aggregation – in wearables…

Interestingly, there are no credible rumors so far about a wearable device from Apple, though there is no shortage of interesting thinking about the topic from various people in the industry. But I continue to think it’s possible that Apple won’t release its own wearable device at all – at least not yet. I think its major play here may be acting as the glue to bring what is presently a very disparate and fragmented set of wearable ecosystems together. Note how many fitness and health devices Apple already sells in its online store. Many of these sync in some fashion with companion iPhone apps, but they all do it separately. Some of the vendors have their own ecosystems, which offer limited integration between their own devices and third party devices for analytics purposes, but they’re largely islands today.

Bringing the data supplied by all these sensors into a single app which would make sense of it all would be hugely more powerful and Apple is one of the few companies that could do it. Its ability to do so would, however, be somewhat hampered if it decided to enter the market itself – it would then be competing with would-be partners, and its position as a hub would be significantly less attractive to them. Meanwhile, the wearables market is made up of so many small niches that it’s almost impossible to imagine how Apple could drive significant revenue (in the context of its existing $174 billion a year business) without launching at least a handful of different products.

… and beyond

But this approach needn’t be restricted to the wearables space. There are at least a couple of other areas where Apple could offer the same approach of unifying a fragmented ecosystem and the most obvious one is the home. At CES this past year, the most obvious trends aside from 4K TVs were wearables and smart home. But the smart home space is at least as fragmented as the wearables space, with players from the home security, broadband router, appliances, mobile services and other industries all vying for a slice of the action and ahough there are some attempts by both vendors and third parties to bring elements together, no one has yet cracked the unified home experience. But Apple is in an excellent position to do so, with both routers (the Airport line) and controllers (iPhones and iPads) already in place, and a huge user base to start with. Apple’s position as an aggregator will be much stronger if it isn’t itself trying to build smart home products, which also seems unlikely given the broad variety of devices it would have to make.

The other obvious area for Apple to apply the theme of bringing order to chaos is payments, where there’s at least as much fragmentation at present. We currently have at least three separate domains today when it comes to payments – classic credit cards, online payments providers such as Paypal, and a plethora of players in the mobile payments sector, from mobile terminals such as Square and Paypal Here to Google Wallet to the US carriers’ Isis initiative. None of these has so far thrived, and fragmentation is again a big reason. Apple’s huge user base and the installed base of Bluetooth LE-capable devices it has in the market are an enormously strong starting point. But the play here would be a different one: creating its own payment system rather than aggregating third-party efforts. System-level integration would be a huge advantage over any third-party app, as iMessage and FaceTime have demonstrated. And Apple’s unique leverage over carriers would allow it to do things Google wasn’t able to with Google Wallet. Tim Cook has already indicated that with hundreds of millions of credit cards on file and the Touch ID system introduced in the iPhone 5S, Apple already has a great starting point for payments.

The big question then becomes, how does Apple make money from any of this? If it doesn’t enter the wearable device space, how does it get revenues growing again? The answer is twofold: firstly, and in some ways most importantly, Apple will strengthen its ecosystem and the appeal of the iPhone, driving more iPhone sales. Conversion, not capturing first-time smartphone users, will be the key driver of growth in the premium end of the smartphone market going forward and Apple has to do all it can to cement the position of the iPhone in that segment. Secondly, these aggregation efforts can each yield revenues in their own right, through licensing (the Made for iPhone program is an existing example of this sort of thing) and in the case of payments through taking a cut of revenues, which could be enormously lucrative in its own right. Neither of these requires Apple to create a new hardware category of its own, and I’m increasingly convinced Apple’s new product categories in 2014 may not be hardware at all.