FBR Capital Market’s Daniel Ives and James Moore have a new note out Friday detailing why they see the wearables market heating up through the second half of this year and into next—and how the competition will play out. They write that with Apple’s (AAPL) entrance into the market with the Apple Watch, the company spearheaded a paradigm shift in the acceptance and adoption of wearables—although of course other players including Samsung (005930KS), Microsoft (MSFT), FitBit (FIT) and Jawbone have helped. And while it’s still in the early innings, they see wearables as a “tangible growth opportunity” and the next potential leg of growth for consumer electronics. They believe the wearables will follow the smartphone model in that third-party applications will be a key driver, “with companies racing to establish themselves as the de facto platform/ standard for certain wearables categories (e.g., watches, augmented reality/smart glasses, bands, etc.).” Thus, next generation software releases, like Windows 10, will become increasingly important. Ives and Moore see augmented reality devices as a main focus for big tech firms like Apple, Microsoft, Facebook (FB) and Google (GOOGL), with wearables ultimately representing a $20 billion market over the next three years. “This multi-billion-dollar market opportunity leaves large technology wearables vendors (e.g., AAPL, MSFT, etc.) as key beneficiaries of increasing consumer adoption, in our view, with Apple in particular poised to expand its all-important ecosystem of devices/services and Microsoft potentially adding another growth avenue to offset PC market headwinds in its core (Windows/Office) offerings.” We have only see the tip of the iceberg so far, with enterprise applications following consumer wearables down the road, leading “vendors of all shapes and sizes [to] engage in a “battle royale” for market/mind share as competition in this next-generation technology area heats up over the coming 12 to 18 months.” More from their note: Apple Watch is a major product catalyst for wearables. As evidenced by Apple’s brand/ unmatched consumer base now behind it, we think the wearables category potentially has a “silver bullet” product, which will continue to move consumers toward this new avenue of technology growth. With the watch adding another potential growth leg to Apple (we estimate approximately 5 million units sold to date), we believe Apple is well positioned to benefit from a fertile wearables market opportunity over the coming quarters. Although it remains early innings for Apple in this device category, in our view, we believe the next generation of the Apple Watch could include a number of new important features (e.g., untethered from the iPhone, camera, etc.) and potentially help drive further demand/top-line growth over the coming years as we estimate the watch could contribute as much as 8% of revenues in FY17. Wearable devices = rapid proliferation. As the mainstream proliferation of wearable devices appears to be underway (IDC forecasts a 43% CAGR in wearables shipments through 2019) with health, fashion, and accessibility as key drivers, a massive land grab opportunity in technology could ultimately open up another avenue for enterprises looking to create applications, devices, and solutions. Wearables will add another layer to the bring-your-own-device (BYOD) trend, in our view, as it represents the next step in the evolution of the interconnected consumer. Overall, we anticipate that strong growth of wearable devices is on the horizon with the Apple Watch as a product catalyst, and as evidenced by the other wearables such as Microsoft’s HoloLens (a holographic computer) generating early consumer buzz. Competition. Software companies operate in a very competitive environment. They typically have a history of rapid growth; this growth, however, is dependent on a company‘s ability to recruit talented personnel, enhance and upgrade its product line, and forecast customer needs and future economic conditions. Customers may defer purchases. Customers may defer or reconsider purchasing software solutions, such as those provided by companies mentioned in this report, if they experience a downturn in their business or if the general economy remains sluggish. Software companies also exhibit above-average volatility relative to other sectors of the market. Rapid technological change. Software companies are highly susceptible to the rapidity of technological change. There can be no assurance that existing products will continue to be positioned properly in the market or that companies will be able to introduce new or enhanced products into the market on a timely basis.
silicon Capital Markets has seen the emergence of a ' battle royale ' in wearables over the next three years , with wear Watch seen as an inflection point in the sector . Wearables would ultimately be a $ 20 billion market over the next three years and that the Apple Watch could contribute as much as 50 % of revenues in FY17 .