Why would anyone sport a Nike FuelBand rather than a stunningly beautiful precision built Swiss timepiece?  The latter is an expression of elegance, professional achievement, and style.  It can speak to the fortunes and success of the wearer.  The Nike FuelBand costs about $150, is made of rubber/plastic, must not be submerged in water, and requires two hands to tell the time.  Given these apparent shortcomings, it may seem paradoxical that the FuelBand is one of several in the wearables product category that is gaining traction with consumers.  Having made the switch, some of us are hooked.

The FuelBand monitors an individual’s activity with “NikeFuel,” a universal way to measure all types of activities and body movement regardless of age, weight and gender.  The FuelBand then transmits data to a personalized account, enabling the owner to track progress towards a goal and compete with other FuelBand consumers.  In essence, Nike has created a bundled product – a product that addresses the “bundled needs” of consumers.  It serves our need to address our health and activity levels; our need to measure, to benchmark progress and to compete; our need to accomplish multiple goals simultaneously in a time-constrained world.

The FuelBand also serves as a simple watch, but more importantly it provides a personalized fitness monitor and a direct link to others in the fitness community.  Product bundling has been common in the software business (ie. Microsoft Office), telecommunications industry (ie. internet, cable, and phone packages), and the fast food industry (ie value meals) for some time, but technology is now facilitating its use in the wearables market.

From a technology standpoint, there are several key factors that are driving wearables adoption.  Of these factors, perhaps the most significant is the growing installed base of smartphones and tablets.  These devices act as personal cloud networks and enable wearables to have access to powerful computing power and ubiquitous connectivity.  In addition, advancements in material sciences, low power wireless connectivity, battery power, and sensory accuracy are contributing to the improved functionality of wearables. Taking these technological innovations and the aforementioned application of product bundling into consideration, the potential growth in the wearables market is raising eyebrows across various industries.  Credit Suisse estimates that the wearables market could grow from $3-5 billion this year to over $42 billion in the next three to five years.  ABI Research, a technology market intelligence company, pegs the wearables market at 485 million annual device shipments in 2018, up from approximately 14 million in 2011.

As with any emerging technology, estimates are exactly that – estimates.  That said, actions speak louder than words and what we’re observing is prominent companies dedicating substantial resources to product development in the wearables market.  Perhaps more important than the number of companies taking notice is the diversity of those companies across economic sectors.  In retail, the apparel industry has been an early adopter of wearables technology and global athletic companies such as Nike, Adidas, and Under Armor have introduced fitness products designed not only to monitor physical activity but to increase consumer engagement. Meanwhile, we’ve seen fewer mainstream product launches in the technology sector.  Samsung launched its Galaxy Gear smartwatch to mixed reviews, but Google Glass is still in the “Explorer” stage (product testing) and Apple has yet to announce a product, though many speculate an iWatch is in the works.  The wearables market is nascent, however, and technology companies leveraged to software (ie operating systems) and internet/networking stand to benefit.  There are also countless applications for wearable technology in the healthcare sector, ranging from products that monitor blood pressure and glucose levels to those that aid the blind by utilizing wayfinding technology.

The Nike FuelBand is likely only the tip of the wearables iceberg.  It will certainly be interesting to see how the market develops and which companies capitalize on the emerging opportunity.

Erika Karp is the Founder & Chief Executive Officer of Cornerstone Capital Inc. and the former Head of Global Sector Research at UBS Investment Bank.Michael Shavel, CFA is a Research & Business Analyst at Cornerstone Capital Inc. and a former Research Analyst on AllianceBernstein’s Global Growth & Thematic team.