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Pe
le Technology Corp
In early September 2014, Pe
le Technology Corp. chief executive officer Eric Migicovsky sat
with his senior executive team to discuss numerous issues. Pe
le Technology manufactured one
of the first Smartwatches on the market (see below). The team met in the boardroom of the
company’s head office in Palo Alto, California. Migicovsky, a Canadian from Vancouver, had
started Pe
le while studying at the University of Waterloo’s System Design Engineering
programme in 2009.
They were meeting the day after Apple formally announced its iWatch. Various rumours put the
launch date of the new product from late 2014 to early 2015. Eric was convinced that Pe
le had
the best smartwatch on the market. This was backed up by numerous independent reviews.
However, his time in Waterloo had made him acutely aware of the potential danger of the
iWatch. After all, the iPhone had nearly put Blackbe
y out of business. The Pe
le team were
wondering whether the iWatch would become a category killer in the way that the iPhone and
iPad had done.
Smart Watches (wearable technology)
Smart watches are part of the wearable technology segment of the technology industry. As smart
phones saturate the market (in 2014, 65 per cent of all mobile devices sold globally were
‘smart’), manufacturers and dreamers were trying to determine the next big thing. Many believed
that wearable technology would generate massive sales. One researcher suggested that shipments
of wearable technology would rise to 485 million units by 2018 from less than 2 million units in
2012. Gartner research, the respected technology market research firm, estimated the market size
to be $20 billion by 2020. In addition to smart watches, items in the wearable technology sector
included fitness trackers (eg FitBit, Striiv, and Nabu); digital clothing that lights up when a call
is received; health care (heart rate or diabetes monitors); and, most notably, Google Glass.
As one might expect, a smart watch is worn around the wrist and tells the time. What makes it
smart is its ability to use Bluetooth to link with a cellphone, generally using the Android or iOS
(Apple) operating systems.
Therefore a smartwatch can notify the wearer of incoming calls or meeting times; display text
messages and updates from social media accounts; track physical activity (eg step counts and
icycling speed and distance); or stock market notifications. The business model for smart
watches is similar to that of the smart phone, in that the manufacturer builds the watch, installs a
certain number of applications on the watch at the factory, and provides an infrastructure for
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others to build apps that will work on the watch. As with smart phones, most apps are developed
y third parties and some are free of charge while others cost a dollar or two.
Smartwatches aren’t meant to replace phones, they are meant to save time and make checking of
notifications more convenient. The first smartwatches came to market in 2010.
Early Development of the Company
While at Waterloo, Migicovsky had begun work on a smartwatch. He was interested in a device
that he could glance at to receive messages while riding his bike to class, rather than having to
stop and pull out his phone every time a message or call came in. Early success led to his
acceptance to participate in the well-regarded Y-Combinator business accelerator programme in
Silicon Valley in 2011. Y-Combinator
ings together a number of aspiring entrepreneurs with
promising ideas, gives them $120,000 to develop their products and mentors the participants and
their companies to help raise the next round of capital. Some notable companies to come out of
the programme were Reddit, Dropbox and ai
nb. At the end of his 90 day stay, Migicovsky
aised approximately $375,000 by selling common shares to three notable venture capitalists
acting as business angels (see Appendix A), and Pe
le Technology was born.
XXXXXXXXXX
On completion of Y-Combinator, Migiscovsky decided to stay in Silicon Valley. Working out of
his two-bedroom apartment in Palo Alto, CA, he used the $375,000 that had been invested to
egin to put together a small team to commercialise his watch design.
The company launched its first product in late 2010: the inPulse smart watch that linked to
Blackbe
y devices only. They sold just 1500 units (approx. $200,000 total sales) of the initial
inPulse production run, partly because of the plummeting interest in Blackbe
y phones. The
company introduced a version that connected to Android devices in late 2011. However, too
many of these watches were built and remained unsold, draining cash from the company.
At the same time as selling the inPulse, the team was working on the development of a second
generation watch to be called the Pe
le.
With funds rapidly diminishing and no interest from the various venture capitalists that he had
contacted, Migicovsky had to turn to an unconventional source of money – Kickstarter, one of
the largest crowd-funding operations. See Appendix A.
In April 2012, Pe
le launched a Kickstarter campaign with a goal of raising $100,000 in 35
days. The first 500 contributors of $115 or more would receive a Pe
le smartwatch when
available. Those who contributed later in the campaign wouldn’t receive a free watch, but would
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eceive a discount on the price of the Pe
le depending on the amount of the contribution. The
campaign was an incredible success. Pe
le blasted through its goal just six hours after going
live and had raised over $4.5 million in the first week. By the end of the campaign, Pe
le had
eceived pledges from 68,929 people and raised $10.3 million (an average of $149 per person) –
a record for Kickstarter at the time.
With the funding from the Kickstarter campaign Pe
le was able to complete product
development, make a
angements with contract manufacturers, and make plans for a marketing
and promotion campaign.
Pe
le Features
When it launched in 2013, reviews of the Pe
le were largely positive. Most thought that Pe
le
was the best smartwatch on the market. It was lightweight; the screen could be viewed in
ight
sunlight as well as complete darkness; it had an industry-leading battery life (up to seven days);
and a customizable watch face. One of its main advantages over the competition (see below) was
that the Pe
le used its own simple notification based operating system to deliver messages to
the screen. The screen itself was a 3.2cm rectangle with a lightweight e-paper LCD display.
By early 2014, there were more than 1000 apps available for the Pe
le. These included
notifications for calls, emails, text messages; remote controls for devices such as the NEST home
heating control system; GPS directions; and, stock prices among others.
Manufacturing
Migicovsky had produced his first smartwatches using components taken from smartphones and
linking them to the software he had written. They were assembled by high school students in
Waterloo. However, he would not be able to achieve his goal of selling millions of smartwatches
using this approach.
As with most items in the mobile communications industry, smartwatches are designed and
developed at head office, but the actual manufacturing is done by contract manufacturers in
China or Taiwan. For example, almost all iPhones are manufactured by Foxconn in Taiwan.
During the summer of 2012, Migicovsky made numerous trips to China to interview potential
contract manufacturers. In January 2013, the selected manufacturer, Foxlink Group, began
shipping 15,000 watches per week.
In the electronics industry, most companies try to sell their products at twice their manufacturing
cost. When new products are launched, they typically ca
y a premium price as early adopters
care less about price than having the newest toy. Prices then fall as the market
oadens and
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manufacturing costs decline. Typical gross margins for a consumer electronics company range
from 25% to 45%, depending on the channel of distribution. If the company sells a product from
its own website, it will charge the same as the price in a retail store and capture the extra margin.
Marketing and Distribution
Unlike smartphones which were usually bought by mobile operators such as Rogers, Telus or
Bell, and then resold to consumers with a service contract, smartwatches followed a more
conventional distribution model.
The end user purchases a smartwatch from an electronics retailer (
icks and mortar) or online –
directly from the company or a site such as Amazon.com. Traditional retailers typically work on
a gross margin of 35 per cent; so if a watch retails for $100, the watch manufacturer receives
$65. Amazon works on the same premise, but its gross margin is much lower – it may pay $65 to
the manufacturer, but sell the product for $85. If sold directly from a company’s web-site,
consumers would pay close to full retail price, and the company would keep the extra gross
margin.
For example:
Sales through traditional retailers
Retail Selling price of watch $100.00
Amount Pe
le receives from retailer $65.00 (approximately)
Amount Pe
le sends to manufacturer $36.00 to $48.00 (approximately)
Gross profit per watch $17.00 to $29.00 (approximately)
Sales directly through manufacturer’s web-site
Retail Selling price of watch $100.00
Amount Pe
le sends to manufacturer $36.00 to $48.00 (approximately)
Gross profit per watch $52.00 to $64.00 (approximately)
Pe
le had a third line of distribution: its Kickstarter campaign. As noted 500 people who
pledged $115 received one of the first watches for free and thousands of others received
discounts on the price. These discounts would eat into the Company’s gross profit margin in the
first year of sales.
Pe
le signed its first
icks and mortar distribution agreement with Best Buy in July 2013. By
the summer of 2014 the Pe
le smartwatch was widely available at retailers both in and outside
of North America. When announced, the Pe
le had a suggested retail price of $199, but this
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price had dropped first to approximately $150 in late 2013 and then to approximately $100 by
summer of 2014.
A premium version of the watch (launched in mid-2014), the Pe
le Steel had a suggested retail
price of $250. The Pe
le Steel had a steel, not plastic casing and premium wrist strap.
Otherwise, the innards and functionality were identical to the Pe
le.
From launch in 2013 to August 2014, Pe
le had sold approximately 500,000 smartwatches.
Competition
Competitors in the smartwatch market ranged from tiny five man Montreal based Neptune, to
global giants such as Samsung, Sony, and Motorola. In addition, in late 2014 all competitors
were waiting for the launch of the iWatch from Apple.
Manufacturer Device(s) Operating System Functions / Features Suggested
Retail
Launch
Date
Samsung Gear Android – links only with
Samsung phones
Camera, voice activation, call
notification, other apps
available
$100 $125+
Sony Smartwatch Android No camera $150 - $350
Motorola (owned by
Google to 01/14)
Moto 360 Android Round face, no fitness or
camera apps
$250+
Neptune PINE Android $350+
Apple iWatch iOS – links only with Apple
products
Unknown $350+ Winte
Spring 2015
Samsung was the market leader in smart watches with Pe
le a strong second. Samsung’s lead
was partially attributable to its bundling a ‘free’ smartwatch with certain phones as a promotional
effort. All competitors were hustling to encourage the development of apps that would make
their devices more attractive to consumers.
2014
As is often the case with new technology companies, spending outpaced revenues by a wide
margin. Working capital requirements for mass production, the addition of staff, marketing
udgets, and future product development all constituted a significant ‘cash burn’ at Pe
le. The
company’s staff was up to 100 from five in only two years – most had been in the technology
industry for a number of years and hence received very good salaries. Pe
le had nearly run
through the $10 million in Kickstarter money when it turned to venture capital financing.
Charles River Ventures, one of Silicon Valley’s most experienced venture capitalists, with 40
years of venture investing experience came on board with an investment of $15 million. In
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exchange, it received a large minority stake in the Company. This money was vital in getting the
Pe
le Steel to market and to fund development of future watches. However, Pe
le continued
to spend more money each month than it received in sales, despite the success of the Pe
le.
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Appendix A
Angel Investors
An angel investor is a wealthy individual who invests his or her own money into a number of
small ventures.