Wearable Devices: the Internet of Things Becomes Personal
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November 19, 2014 MORGAN STANLEY BLUE PAPER MORGAN STANLEY RESEARCH Global Katy L. Huberty1 François Meunier6 James Faucette1 1 Keith Weiss 2 Shawn Kim 3 Masahiro Ono 4 Jasmine Lu 5 Sharon Shih 5 Grace Chen 1 Joseph Moore 1 Craig Hettenbach 4 Bill Lu 6 Louise Singlehurst 3 Hiroshi Taguchi 1 Jay Sole 1 Betsy Graseck Wearable Devices 1 Smittipon Srethapramote 4 Robert Lin The ‘Internet of Things’ Becomes Personal 4 Edward Lui Ricky Goldwasser1 Ramping faster than even smartphones and tablets. Persistent identity is the “killer” David Lewis1 feature that will ignite a long tail of industry use cases and augment existing mobile Andrew Schenker1 applications, such as sensor analytics and mobile payments. We model 154% unit CAGR 6 Ben Uglow in 2013-17, more than double industry estimates, with shipments reaching 248 million in 6 Lucie A. Carrier 2017. Our bull case 1 billion unit forecast for 2020 is driven by upside in enterprise 6 Markus Almerud adoption, subsidies for consumers, and broader use cases. Best-positioned companies include Apple, Samsung, Microsoft, and analytics *See page 2 for all contributors to this report companies; component suppliers AAC, Goertek, Quanta, and Zhen Ding; Invensense, 1 Morgan Stanley & Co. LLC Ambarella, Atmel, NXP Semiconductor, Freescale, Microchip, ARM, Imagination Tech, 2 Morgan Stanley & Co. International plc, Seoul ASE, Maxim Integrated Products in semiconductors; Nike, Adidas, Under Armour in Branch+ 3 Morgan Stanley MUFG Securities apparel; existing credit card value chain; Intime and Chow Tai Fook in China retail; Co., Ltd.+ Dexcom, Insulet, Abbott, Medtronics, Philips, UnitedHealth and CVS in healthcare; 4 Morgan Stanley Asia Limited+ 5 Morgan Stanley Taiwan Limited+ Legrand and Assa Abloy in industrials. Potentially challenged are Garmin, LG, and 6 Morgan Stanley & Co. International plc+ Sony; traditional watch brands Swatch Group, Casio, Citizen, and Seiko; Gemalto and eBay in payments; Hengdeli and Luk Fook in China retail; Osram in industrials. What could limit wearables adoption? Wearables need to offer data accuracy, Morgan Stanley Blue Papers focus on critical appealing design, ease of use and independence from smartphones. In addition, it may investment themes that require coordinated be harder than expected to change consumer behavior. Consumer adoption may also be perspectives across industry sectors, regions, or asset classes. constrained by device fatigue or limited willingness to share personal data. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. * = This Research Report has been partially prepared by analysts employed by non-U.S. affiliates of the member. Please see page 2 for the name of each non-U.S. affiliate contributing to this Research Report and the names of the analysts employed by each contributing affiliate. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. MORGAN STANLEY RESEARCH November 19, 2014 Wearable Devices Contributors to this Report Hardware Katy L. Huberty1 +1 212 761-6249 [email protected] Jerry Liu1 +1 212 761-3735 [email protected] Shawn Kim2 +82 2 399-4940 [email protected] Jasmine Lu3 +886 2 2730-2870 [email protected] Yun Chen Tsai3 +852 2848-5636 [email protected] Sharon Shih4 +886 2 2730-2865 [email protected] Grace Chen4 +886 2 2730-2890 [email protected] Communications Equipment James Faucette1 +1 212 296-5771 [email protected] Meta Marshall1 +1 212 761-0430 [email protected] Software Keith Weiss1 +1 212 761-4149 [email protected] Melissa Gorham1 +1 212 761-3607 [email protected] Consumer Electronics Masahiro Ono5 +81 3 6836-8410 [email protected] Hiroshi Taguchi5 +81 3 6836-8411 [email protected] Semiconductors Francois Meunier6 +44 20 7425-6603 [email protected] Joseph Moore1 +1 212 761-7516 [email protected] Craig Hettenbach1 +1 212 761-6435 [email protected] Sajal Dogra1 +1 212 761-6320 [email protected] Bill Lu3 +852 2848-5214 [email protected] Consumer and Retail Louise Singlehurst6 +44 20 7425-7239 [email protected] Josephine Tay6 +44 20 7425-3623 [email protected] Elena Mariani6 +44 20 7425-0527 [email protected] Jay Sole1 +1 212 761-5866 [email protected] Joseph Wyatt1 +1 212 761-4206 [email protected] Angela Moh3 +852 2848-5405 [email protected] Robert Lin3 +852 2848-5835 [email protected] Robby Gu3 +852 3963-0277 [email protected] Edward Lui3 +852 2848-5874 [email protected] Claire Cao3 +852 3963-4387 [email protected] Payments Betsy Graseck1 +1 212 761-8473 [email protected] Smittipon Srethapramote1 +1 212 761-3914 [email protected] Healthcare Ricky Goldwasser1 +1 212 761-4097 [email protected] Julie Murphy1 +1 212 761-3867 [email protected] David Lewis1 +1 415 576-2324 [email protected] James Francescone1 +1 212 761-3222 [email protected] Andrew Schenker1 +1 212 761-6857 [email protected] Cornelia Miller1 +1 212 761-3809 [email protected] Capital Goods Ben Uglow6 +44 20 7425-8750 [email protected] Lucie A. Carrier6 +44 20 7677-0884 [email protected] Markus Almerud6 +44 20 7425-9870 [email protected] Andrew Caldwell6 +44 20 7425-2177 [email protected] 1 Morgan Stanley & Co. LLC 3 Morgan Stanley Asia Limited+ 5 Morgan Stanley MUFG Securities Co., Ltd.+ 2 Morgan Stanley & Co. International plc, Seoul Branch+ 4 Morgan Stanley Taiwan Limited+ 6 Morgan Stanley & Co. International plc+ See page 92 for recent Blue Paper reports. 2 MORGAN STANLEY RESEARCH November 19, 2014 Wearable Devices Table of Contents MORGAN STANLEY BLUE PAPER Key Takeaways....................................................................................................................................................................... 4 Executive Summary ................................................................................................................................................................ 6 The ‘Internet of Things’ Era: If You Build It, Will They Wear It?............................................................................................... 8 Current Vendors and Share ............................................................................................................................................. 9 Usage and Use Cases ..................................................................................................................................................... 10 Fitness Tracker Trial ........................................................................................................................................................ 11 Wearable Market Outlook........................................................................................................................................................ 14 Purchase Intention for Current Vendors........................................................................................................................... 14 Potential New Entrants..................................................................................................................................................... 16 Future Use Cases ............................................................................................................................................................ 17 Morgan Stanley Wearables Model: Base Case....................................................................................................................... 18 Enterprise Adoption and Subsidies Drive Our Bull Case Forecast.......................................................................................... 21 Risks to Wearables Adoption .................................................................................................................................................. 28 Industry Read-Across Computing........................................................................................................................................................................ 31 Component Supply Chain ................................................................................................................................................ 41 Semiconductors ............................................................................................................................................................... 45 Watches ..........................................................................................................................................................................