The Apple Watch is set earn Apple about $US16.5 billion in revenue by 2020 in a wearables market worth $US27 billion.
The according to the latest Ovum analyst research, predicts sales of wearable devices to reach 394 million units in 2020, up from 24 million units in 2014, corresponding to a compound annual growth rate of 60 per cent.
Revenues generated from the direct sale of wearable devices to consumers will reach $US26.6 billion in 2020, up from $US3 billion in 2014.
Multipurpose wearables such as the Apple Watch will account for 31 per cent of the installed base, with simple activity trackers and smart clothes making up the rest of the market. But volume does not equal value.
Multipurpose wearables will account for 62.3 per cent of total retail revenues in 2020, equivalent to $US16.5 billion in sales.
Wearables also offer additional software revenue opportunities via a dedicated app ecosystem that will serve up to 176 million installed devices by the end of 2020.
According to the research, wearables will become much more capable and "smart" over the next five years.
Ovum has designed a smartness index to quantify this evolution, based on whether a wearable features a screen, supports third-party apps, and/or operates autonomously (see definition at the bottom of this release).
Recent product releases such as Microsoft Band, Fitbit Surge, and Pebble Steel show that activity trackers are becoming smarter. We expect the average smartness index for activity trackers to grow from 1.27 in 2014 to 1.88 in 2020.
More than 60 per cent of the installed base of activity trackers in 2020 will have a smartness index above 1.
Ovum lead analyst for consumer technology, Ronan de Renesse, said affordability and better quality of service for smarter wearable devices would be key drivers in the shift from activity trackers to multipurpose wearables such as the Apple Watch.
"Currently, the market is overcrowded in comparison to demand," he said.
"Supply chains and marketing investments need to be tightly controlled. Larger vendors able to sustain investments for longer stand a better chance of establishing a market lead."