Creating an Enterprise-Sized Ripple
The consumer market for smartwatches will become saturated by Apple and Android devices; Pebble needs to respond quickly
With a total backing of over $20M, Pebble regained its title as the most funded campaign in Kickstarter history for the Pebble Time smartwatch in March this year. This surpassed the $10M in campaign funding for the original Pebble smartwatch. Despite being the first company to manufacture a commercially successful smartwatch and garner continued excitement for their products, Pebble struggles to retain market share. Major smartphone manufacturers including Samsung, LG, and Apple have all released smartwatches in the last two years, leaving Pebble to exist only as a small player amongst giants.
A Pebble Amongst Boulders
When the Apple Watch was released in April 2015, Pebble’s smartwatch market dominance was in question. In a study of consumer perceptions about smartwatches, 93% of people identified Apple as a smartwatch manufacturer. However, only 11% of people made this same recognition for Pebble, despite the company’s exclusive focus on manufacturing smartwatches. Pebble faces the challenge of gaining stronger brand recognition over its more established competitors.
Pebble’s mass-market approach contrasts with the strategy taken by its peers. Competitors such as Apple Watch and Android Wear have typically positioned their smartwatches as convenient, pseudo-luxury peripherals to consumers, offering high-end features and sophisticated functionality normally found on a smartphone. Pebble would struggle to match these features due to its position as a cost leader.
Furthermore, Pebble cannot match the scale of its competitors. In its first week, the Apple Watch sold over one million units, a feat which took Pebble almost two years. In the first quarter of its release, the Apple Watch captured 75% of market share, knocking Pebble down to only 8.1% of the market by the end of the year. By 2020, it is projected that Pebble will fall to 3.1% market share from continued competitive pressure. Pebble has built a strong community around its products, but in a consumer-facing market where buyers are increasingly willing to pay for higher-end features and a recognized brand, it will struggle to compete.
Although business users present the next logical market for smartwatch manufacturers, this market will likely be won by the dominant players in the consumer market. Smartwatches are being introduced to enterprise through Bring Your Own Device (BYOD) programs. An individual can only wear a single watch, thus the smartwatches that make their way into enterprise will likely be those that have already won over the consumer at home. There will be limited room for Pebble in the long term in the enterprise market as it will lack significant differentiation from the consumer market saturated by Apple and Samsung. While the new Pebble Time Round was a step in the right direction, it will ultimately not be enough for Pebble to compete and succeed with business users or consumers in a highly competitive market.
Pebble’s Current Position
Investment into research and development is critical to bringing innovative new products to market and finding a niche where Pebble’s large competitors will not venture. However, Pebble does not have access to the same scale of capital and faces a higher cost of capital compared to its competitors. Given its limited capital resources and difficulty in raising funds from venture capitalists in the past, Pebble has historically turned to crowdfunding. However, rewards-based crowdfunding is dependent on having a product which can be marketed to end customers. Therefore consumer-focused crowdfunding will not viably provide sustainable access to capital for R&D.
In addition, Pebble has yet to identify the unique areas of the market where they can win over competitors. Pebble watches are known for their emphasis on unique features and value. The Pebble Time smartwatch boasts a battery life of up to 7 days, and better visibility in low-light and bright conditions. These features are likely more applicable in an industrial or operational context compared to a consumer market, where functionality is valued over form. While consumers desire a touchscreen, Pebble’s four buttons would be more practical in work situations. Pebble is more intuitive at work if the user is wearing gloves or cannot look down to select an option.
Pebble is also compatible with both iOS and Android OS phones, a capability which only one other manufacturer, Motorola, currently provides. Pebble has also added extensive functionality to their smartwatches by growing the app store. Though Pebble’s app store currently hosts 12,000 apps, Apple Watch and Android Wear on about to catch up within a year, hosting 10,000 and 4,000 apps, respectively. Apple Watch and Android Wear will likely surpass Pebble’s app store figures, but a significant differentiator for Pebble is the price for the value. Compared to the $400 Apple Watch, the Pebble Time is priced at only $200, and the original Pebble Watch at $99. The reasonable price of Pebble’s smartwatch makes it a more viable, realistic option for adoption at scale in an enterprise or operational context.
Time to Make a Move
The enterprise market provides a sizable and growing market opportunity for Pebble. Wearable technology is a growing priority for many firms, and the market for enterprise wearables is expected to reach $8.5B by 2020. While BYOD will become the norm for business professionals, companies will continue to purchase corporate-liable devices in situations that require device uniformity or specific needs. The enterprise market is positioned for 139% CAGR by 2020, significantly higher than the growth expected in the consumer market. Enterprise and industrial wearables will comprise 17% of total wearable device revenues by 2020, growing from only 1% of the market when smartwatches were first released in 2013. Pebble’s focus on functionality and low price makes it more desirable than competitors when meeting the needs of industrial or operational users.
Pebble is best suited to innovate for the industrial or operational intensive market due to its lower cost of technology. Competitors are locked into high costs and “cellphone-class technology”. They have a cost-intensive baseline given their must-have features, whereas Pebble can incorporate new technologies in a low-cost implementation. Pebble has positioned itself to innovate more readily and more rapidly for different user groups.
Kickstarting Pebble’s Value
Pebble should position its smartwatches for operationally focused businesses through an enterprise sales program. Applications of smartwatches in industries such as construction, retail sales, and warehousing, can create substantial productivity gains. However, the value of a smartwatch in industry has yet to be fully defined. Pebble should work directly with industry-leading companies during the R&D phase to gain a better understanding of the unique needs of that industry in order to develop the most valuable features.
Pebble should establish partnerships with innovative companies across a range of industries, both to gain from their understanding of industry needs, and to provide joint investments into capital required for R&D financing. Out of the 200 leading companies across multiple sectors, including manufacturing, telecom, automotive, and retail, 38% have set up digital Innovation Centers that aim to gain access and exposure to the latest technologies. Companies which are making investments into technological innovation would be well-suited to partner with Pebble to identify how smartwatches can create productivity gains within their company. In capital and capacity-constrained firms, R&D financing and partnerships should adopt a cost and risk-sharing framework. The companies would be willing to invest in the R&D since they will be reaping benefits from the productivity gains provided by the smartwatch features designed to meet their unique needs.
In a similar structure to the rewards-based crowdfunding Pebble has previously used, the expected return comes from the product itself, not an investment into the company. This provides a unique method of financing for R&D which aligns the interests of both parties in bringing new products to market tailor-made for the industry.
Restaurants: An Industry Application
Pebble could partner with a national restaurant franchise to explore applications of smartwatches to assist servers with keeping track of orders and tables. With wearable technology, restaurants can increase the productivity of their staff and thus increase overall profitability. Notifications would play a vital role, where the user would receive real-time feedback used to reduce meal lengths in various situations, such as when the customer requests the bill or wishes to order. Pebble should act as the companion to tablets to further increase restaurant throughput time by providing instant information updates to all servers.
Restaurants facing overcapacity constraints during rush hour periods and equipped with existing technology infrastructure such as tablets to order meals are the ideal targets assumed in the model. Assuming the partnership requires an upfront app development investment of $350,000 and hardware costs totaling $18,000, both spread across 10 restaurants, the per location cost of implementation is $36,800. In the average restaurant containing 12 tables of four people, the average bill per table is $72. Applying the industry average EBITDA margin of 25% results in each location having to breakeven by serving four additional tables per day. This translates to 7.2 minutes required reduction in meal time per table, or a 10% reduction in average meal length. The aforementioned inefficiencies are typically staff-driven and are inherent in the serving process, reinforcing the feasibility of the breakeven improvement through notifications. Using the conservative breakeven productivity gains, each location would increase their annual top-line revenue by $106,000. As such, significant value can be derived with a partnership for industry leaders, where productivity and cost- cutting measures are demanding increased attention.
Overall, the size and strengths of competitors will prevent Pebble from gaining significant market share in the consumer or business professional market. By targeting specific industries through enterprise sales, Pebble can work with industry partners to identify the unique value of smartwatches in their context. Pebble smartwatches can be used by doctors to manage patients, retail sales associates to check inventory, and line operators to manage manufacturing operations. Pebble has the opportunity to use its low technology cost to innovate in the market and retain a competitive position for future growth.