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Apple iWatch, beware. Samsung plans to clock you

Now that Samsung has said it’s working on a high-tech watch, one that presumably will pack smartphone features, 2013 could shape up as the year of smartwatch wars, with longtime foes Apple and Samsung leading the battle.

The motivation, Wall Street analysts argue, is that the biggies need another act as growth of smartphones sales are already slowing. Could smartwatches become that act? It might sound like a long shot; many people already are abandoning watches and relying on their phones instead. And in an age of ever-expanding phone screens, a device for the wrist comes with obvious limitations.

Yet Samsung is publicly prepping for this fight. Apple has been mum amid a slew of reports that it has a team in Cupertino, Calif., working on the iWatch, or whatever it might be called. Startup Pebble, meanwhile, has already gained a big fan base, showing that an app-filled watch that’s linked to a smartphone certainly has some eager customers.

For Samsung, however, this is hardly new terrain. Go back in Samsung history — to the heady days of 1999 — and you’ll find that Samsung was already pushing a Dick Tracy-like device. Why? Because the wireless market was “saturated.”

Here’s Samsung’s press release about its first watch phone, the SPH-WP10:

The SPH-WP10 is Samsung’s first product developed as part of a market segmentation strategy designed to respond to the nearly saturated domestic market for wireless handsets. The new product signals new marketing approaches by domestic manufacturers to target specific generations of mobile telecommunications service users.

At the very end of the announcement, the company adds: “Samsung officials expect their new watch phone to be a big hit with the youth market.”

With 90 minutes of talk time, a design that would probably get you an extra-special pat down when going through airport security, and a $700 price tag, the SPH-WP10 obviously did not set the world (or the youth market) on fire. Samsung tried again a decade later with the S9110, a much more svelte design that had nearly three times the talk time of the SPH-WP10, but still cost more than $600. Surprisingly, it never made it to the U.S., and was only available in France.

Samsung’s belief that the domestic handset market was “nearly saturated” was off too. That market was disrupted by the advent of smartphones, a market that’s grown so fast, and so large, that it overtook feature phones in worldwide sales in the fourth quarter of 2012, according to IDC.

So why return to a product genre that failed to catch on twice, and as recently as four years ago? Things have changed, and so has Samsung.

In 1998 — the year before its first watch-phone — Samsung had just 60,000 employees and made $16.6 billion in revenue in the U.S. Now it has 236,000 employees, and did more than $188 billion in sales last year alone. Smartphones and other mobile devices made up nearly half of that.

A brief history of smartwatches (pictures)

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On the business side, analysts now guesstimate that there’s about $56 billion a year to be made (or taken away from) in the watch market. Marshal Cohen, chief industry analyst with The NPD Group, suggests it might be $40 billion, and says that market has been falling since 2006, right before smartphone popularity exploded.

“The watch business took a double whammy. It took a hit in functionality from smartphones, and then another from the economy,” Cohen told CNET.

The new hope, perhaps, is that the money comes on top of what people spend on smartphones, not instead of them. And that market could be even bigger if you figure that people would buy them instead of MP3 players and other small, portable electronics, says Bernstein Research analyst Toni Sacconaghi.

That very idea is something that sets the modern-day smartwatch apart from Samsung’s past, failed efforts. Consumers don’t necessarily want a mashup of a phone and watch with limited capabilities. But a watch that promises to enhance the smartphone experience is an easier sell.

More recently, companies have run with that idea, shying away from trying to shoehorn the phone inside a watch, choosing instead to link up to people’s smartphones using Bluetooth. There’s good reason for that strategy. You can run big, beautiful apps on the phone, taking advantage of its large display, powerful processor, and always-on data connection, but keep what you do on the watch limited to things that suit the smaller size. So while playing Real Racing 3 on the watch may not be a good idea, quickly glancing over to see a text message is more convenient.

Smartwatch maker Pebble did this to create a small device with a handful of bite-size apps, but where most of the heavy lifting is happening on the phone. Does everyone now have a Pebble? No, but its Kickstarter campaign very quickly raised more than $10 million, well beyond the upstart’s expectations.

That brings us to Apple, which is reportedly working on its own wearable device to release later this year. How exactly it will fit in with Apple’s ecosystem is unclear, specifically because the big assumption is that it will be able to run iOS apps, just like the iPhone and iPod Touch. The only problem with that theory is Apple’s track record of segregating its cheaper, smaller devices with completely different software.

The iPod Nano, which has been the shining example of where Apple’s watch efforts would ascend from, runs a special operating system. The latest version may look a bit like the iOS that Apple uses on the iPhone and iPad, but there’s no way to expand its features through something like the App Store. And it’s still entirely dependent on Apple’s iTunes desktop software to get it up and running. If Apple’s watch will be a companion to a smartphone or a computer, it could follow suit.

But Apple has some serious incentive to veer from that strategy and expand the iOS platform, said Barclays analyst Ben Reitzes. In a note to investors last month, Reitzes noted that the firm was tracking a high rate of customers coming back to buy these types of devices every few years, and by broadening iOS, Apple could set up a nice recurring business — kind of like subscriptions.

“We believe that Apple actually has recurring revenue in the 40 percent range overall — much higher than most likely believe,” Reitzes said. “If the company can continue to add new products and services — the repeating nature should only grow.”

Therein lies one of the differences between Apple and Samsung though. Where Apple has shown high reservation in expanding its product lines (see the iPhone and iPad as the most recent example of that) and marketed them based on that very simplicity, Samsung’s modus operandi is to try things out and see what sticks. It may have some strange side effects like featuritis and devices that just don’t take off, but that very strategy has led to seemingly improbable successes like the Galaxy Note. Whether it will pay off with something you strap to your wrist, well, only time will tell.

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