Computers that you wear. It sounds far-fetched, but it’s coming — no matter what you feel about it. Some early wearables do seem far-fetched. But there are plenty of other options that are coming soon, most likely before the holiday season. What companies might be able to boost profits on the wearable computing trend? Let’s take a look.
“We Need a Hit”
Firmly entrenched as a staid enterprise business, seemingly no one thinks that Microsoft Corporation (NASDAQ:MSFT) has any potential in wearable technology. It seems to always flop with Windows on phones, and its Surface tablet appears to be just a way to sell Windows 8 — which is not doing well. Microsoft Corporation (NASDAQ:MSFT) knows that it needs a consumer hit outside of the Xbox. It has been steady with R&D, keeping spending at around 13% of annual revenue in the past three years. That’s around $10 billion every year for the company to try to develop new products and services.
Hopefully, some of that spending will result in some sort of consumer wearable technology. Microsoft Corporation (NASDAQ:MSFT)needs a hit, as its income has dropped 20% from 2011 to 2012. Tried and true, it’s betting on a new Xbox. But the same company that came out with the motion gaming Kinect device has to have some sort of wearable product up its sleeve. Will it come along with the release of the next Xbox?
Finding its way into hardware
Google Inc (NASDAQ:GOOG) needs to find a way to keep advertising revenue up and growing. So, it’s no wonder that it is trying to make a big deal out of Google Glass. The idea is that releasing this product to early adopters will translate into an ecosystem around this tech — and more advertising sales somehow. There has been a tepid response to Google Glass so far. Poor battery life, limited wireless capabilities, and privacy concerns have plagued it.
Yet, Google Inc (NASDAQ:GOOG) is on to something in selling hardware. In 2012, the company reported that 8.2% of revenue came from Motorola, which sells mobile devices and other miscellaneous electronics. This diversification is important, as the company has been criticized for being a one trick pony that could dry up in a drought of advertising. Indeed, the company now derives over $6 billion in revenue from sources outside of ads thanks to Motorola.
The biggest wearable company of all?
Gartner predicts that the wearable tech market will hit $10 billion by 2016. But they expect a majority of that money will come from athletic gear that is deemed “smart.” With that, the best bet is on Apple Inc. (NASDAQ:AAPL) making the most of this market. Why? Because the demographics in the United States suggests that Apple already has a major foothold in the trend towards mobile fitness technology.
According to Apple’s most recent quarterly filing, its Americas operating income went down to $5.1 billion from $5.6 billion a year earlier even though net sales went up 6.5%. It appears that this is a trend in most other regions as well. That might suggest that producing complex devices like iPhones will continue to take a bite out of revenue. With that in mind, selling simplistic add-ons like watches or fitness bands would be a great complementary product to smartphones, helping overall growth.
The best investment for wearables
It was recently reported that Microsoft Corporation (NASDAQ:MSFT) was granted a patent that allows data to transfer via the human body. This suggests that the company’s research division has been working on wearable innovations. But, Microsoft Corporation (NASDAQ:MSFT)’s soiled history of failed consumer products makes its foray into wearable computers suspect at best. One exception: a product associated with its Xbox brand. The company’s R&D in its Entertainment and Devices Division topped $140 million, or a 44% increase in Q1 2013, related to what the company calls an increase in work on interactive entertainment.
Many have criticized Google Inc (NASDAQ:GOOG) for being too singular, focused on ad revenue. But the company’s purchase of Motorola shows that it knows hardware is the new frontier for them. In Q1 2013, the company posted $1 billion in revenue from hardware alone, making up 7% of revenue for the period. That is a major year over year improvement from nothing in Q1 2012. Google Glass also proves that the company will take on the criticisms of wearable tech with what could be considered the most ostentatious example of it seen so far.
But, it is Apple Inc. (NASDAQ:AAPL) and its iOS ecosystem that will likely be the biggest benefactor of wearables. Year over year sales of iPods have decreased 20%. Sales of iPhones are up a scant 3%. iPads are doing well with a YoY 40% sales increase. But that’s not sustainable. Apple Inc. (NASDAQ:AAPL) needs to release a product to combat slowing iPhone and tepid iPod sales. If it doesn’t release something, its competitors will. Reduction in costs is an important factor as well, one of the key reasons it wants to break off its semiconductor relationship with Samsung.
Another reason for the split? Samsung is probably going to get into the wearables business too.
The article The Wearable Computing Boom originally appeared on Fool.com and is written by Daniel Cawrey.
Daniel Cawrey has no position in any stocks mentioned. The Motley Fool recommends Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG). The Motley Fool owns shares of Apple, Google Inc (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT). Daniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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