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Samsung's new challenge: Sharing the smartwatch market with Apple

For the first time, Samsung will be launching a wearable while a device from key rival Apple is available. But don't count Samsung out yet.

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Samsung teased its new smartwatch, the Gear S2, during a video at its Unpacked event in mid-August.

Samsung

Samsung is hoping the seventh time's the charm, even though the company is now facing off against the Apple Watch.

The South Korean electronics giant will show off its latest smartwatch -- its first in a year but seventh since late 2013 -- this week. The Gear S2 features a round screen and runs Tizen, Samsung's homegrown software.

More importantly, it's Samsung's first smartwatch since Apple released the Apple Watch in April. That presents both challenges and opportunities for Samsung. The success or failure of the Gear S2 could have long-lasting implications for how Samsung fares in this burgeoning market. It's a market the company had hoped to dominate early, but Samsung now finds itself potentially crowded out by Apple.

When Samsung introduced its first smartwatch, in September 2013, it was largely on its own. There were a few players in the market -- including Pebble and Sony -- but the field was open in terms of what would attract consumers. Samsung released a quick succession of products in an attempt to figure out what appealed to buyers before Apple could show off its first device. That helped Samsung become the biggest smartwatch vendor in the world in 2014 despite some of the criticism of its gadgets and the confusion caused by releasing so many devices.

But things changed dramatically in the wake of the Apple Watch. Samsung's smartwatch market share fell from a whopping 74 percent in the second quarter of 2014 to 7.5 percent in the same period this year, according to Strategy Analytics. Apple, meanwhile, nabbed 76 percent of the market in the first quarter its smartwatch was available. Samsung's Gear S, which featured a 3G wireless connection and hit the market in November, couldn't compete with Apple's much-hyped device.

Even Apple has had some problems, though, and that's where Samsung has opportunities. The Apple Watch is far and away the best-selling smartwatch, but it hasn't yet hit mainstream status. Most people buying the device are still early adopters who will purchase anything Apple makes. The real opportunity for Apple, Samsung and others in the market is when mass consumers decide they can't live without smartwatches. So far, no device vendor -- including Apple -- has found the winning combination.

"The Apple Watch has been far more successful than anyone else's watches, but it hasn't been a runaway hit," Current Analysis analyst Avi Greengart said. "That gives Samsung some breathing room."

Samsung has had a year to learn from its early wearables efforts and perfect its smartwatches. It also has the benefit of knowing what does and doesn't work with the Apple Watch, though Justin Denison, vice president of product strategy and marketing at Samsung Electronics America, refuted the belief that Samsung waited for the Apple Watch before figuring out its next move.

"I don't think you'll ever see Samsung just wait and see," he said in an interview in August after Samsung's Unpacked event for its Galaxy Note 5 phone.

Samsung still has significant hurdles to overcome with its smartwatch, including offering enough apps to make its device attractive and deciding whether it's willing to make the Gear S2 work with non-Samsung phones, something it has shunned in the past. Samsung also has to ensure the entire experience with the smartwatch is seamless, and that it has a sleek design that people want to wear.

Up to the challenge?

One of the biggest advantages the Apple Watch has over Samsung's Gear devices is the number of apps available. People can do everything from open their garage doors to pay for items with the Apple Pay mobile-payments system.

Samsung has sponsored contests and assisted developers with Tizen apps, but interest has remained low compared with iOS. Most app developers go with Apple's iOS and Google's Android software, with Microsoft's Windows software for phones and Tizen often afterthoughts. In general, software is an area where Samsung has long struggled. Many of its homegrown apps have been dubbed "bloatware," a derogatory term for unwanted software, and it has tended to kill off its own attempts like its Media Hub.

At the time of the Apple Watch launch in April, there were only about 3,000 Gear apps available. The Apple Watch debuted with about 3,500 apps and has expanded to about 8,500 as of July. And even though Android Wear devices haven't sold well, there are more than 4,000 apps available for the smartwatches.

With a round Samsung watch, developers will have to tweak their earlier designs for the new face. Samsung gave them months of lead-time by making its software available to developers in April, but that doesn't necessarily mean there will be thousands of apps available for the round watch right away. For many developers, creating a Tizen app may not yet be worth it. A device has to have a lot of buyers to get people to make apps, but there also have to be good apps to get people to buy the device. It may be up to Samsung to first create useful apps of its own and then expand the software from partners.

"If they really want to jump-start it, they've got to create apps in good volumes," Creative Strategies analyst Tim Bajarin said.

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Making the Gear S2 work with a broad array of Android devices -- or even the iPhone -- could help Samsung attract more buyers and therefore draw in more developers. While iOS users are often loyal to Apple's family of products, the same isn't true with Android. Users may have a tablet from Samsung but a smartphone from LG. Samsung could theoretically tap into a much larger market by going after all Android phone customers.

Another hurdle for Samsung has been the design factor. Some of Samsung's early smartwatches were criticized for being bulky screens strapped to the wrist, but products like the Gear Fit have been sleeker. Motorola's round Moto 360 smartwatch became the most popular Android Wear device early on because of its round screen -- something Samsung undoubtedly noticed. The glimpse Samsung gave of the Gear S2 at its Unpacked event in New York shows it's made strides and refined its smartwatch designs.

But even if Samsung has addressed all those problems, the biggest hurdle for it and all other smartwatch makers is showing consumers why they need the gadgets.

"The problem with wearables, why nobody's had a clear hit, is consumers don't see them as vital," Kantar Worldpanel analyst Carolina Milanesi said. "It's as simple as that."