Apr 1, 2003 12:00 PM

Wrist-Top Revolution

How fashion watchmaker Fossil teamed up with Microsoft and Palm to change the face of wearable computing.

Since 1946, the sleek telephone wristwatch worn by comic strip detective Dick Tracy has dangled in the consumer psyche – alongside the personal jet pack and the robot butler – as a Future Product We'd Like to Have. The square-jawed gumshoe's ability to get the inside dope anytime, anywhere on thugs like Flathead, BB Eyes, and the Brow made the gadget itself more famous than any of Tracy's exploits. Over the years, the man became an accessory to the watch, which worked like a modern-day cell phone but was small enough that cartoonist Chester Gould had to ink the words "2-Way Wrist Radio" in a caption box with an arrow pointing to the device.

Nearly six decades later, "Dick Tracy watch" is shorthand for an unfulfilled desire, something industry should have long since delivered. We can sequence the human genome, but we can't make a Dick Tracy watch?

Fossil, the nation's biggest watchmaker, is on the case. Since its founding in 1985, the Richardson, Texas, company has come to own the American wrist – last year it made four out of every ten fashion watches sold in the US. It also clocked $650 million in sales, partly by expanding into everything from backpacks to sunglasses, and opened its own retail outlets. The company's new ambition is to fuse fashion and information. In May, Fossil introduces a Palm PDA in a watch, complete with infrared data port and a stylus hidden in the band, followed in midsummer by a one-way data-radio model based on Microsoft's Smart Personal Objects Technology protocol, known as SPOT. The making of these watches is a story of unlikely partnerships at the nexus of consumer style and computer tech, manufacturing, and retail science. The results, Fossil executives hope, will open up a virgin segment of the marketplace to technology and change the way we think about our wrists.

If Fossil is at the center of a wrist-top revolution, the man who owns the silver Porsche parked outside any headquarters is the reason why. Clad in a GQ-ready ensemble of chunky-soled loafers, cable-knit tan turtleneck sweater, distressed blue jeans, and matching watch, Donald Brewer slumps in a conference room chair like P. Diddy without the entourage. Forgive the 32-year-old VP of technology development for feeling a bit smug. He's just back from CES, where Bill Gates threw around terms like "super excited," "pretty amazing," and "magic" while brandishing the SPOT watch onstage during his keynote. Six weeks earlier the Fossil PDA watch won Best of Show at Comdex. Brewer feels like he has Dick Tracy nailed. "His watch is just a couple of basic ideas – the need to know the time and the need to get information," Brewer says. "But that combination is really compelling. It's stuck in people's heads."

From a technical standpoint, there's no denying the feats of miniaturization pulled off by Brewer's team of engineers and partners. Fossil tapped the brainpower of PalmSource, Flextronics, and Motorola to cram an unprecedented amount of muscle into the PDA watch. It has a 33-MHz Motorola Dragonball processor, 2 Mbytes of RAM, and 2 Mbytes of Flash memory, uses Palm OS 4.1, and runs any Palm application. The SPOT watch features a circuit board designed by Microsoft and built by National Semiconductor. Redmond envisions its SPOT products pushing sports scores, weather information, traffic reports, instant messages, and other data to any number of inexpensive displays – like travel clocks and key chains – with Fossil's watch among the first to market.

But Brewer's bosses are less concerned with impressing the Slashdot crowd than winning favor with retailers in New York, Tokyo, Paris, and Berlin – and thousands of shopping malls in between. That's where the design comes in. Thanks to Fossil's exacting standards, the new lines may be just appealing enough to convince nongeeks to want geek watches – while giving geeks a shot at looking cool. If so, the feverish collaboration between high style and high tech that produced the watches could have profound effects on both businesses. While the tech industry sells complex products at retail in a relatively unsophisticated way, fashion retailers sell simple products in a much more sophisticated way. A successful cross-breed could be worth more than the sum of its partners. "This is where the business is headed," says Mike Barnes, Fossil president of international and special markets. "We've reached a position of dominance; we need to take the next step before someone else does."

| Mike Lorrig Left: With a Dragonball processor, Palm OS 4.1, infrared port and hidden stylus, Fossil's PDA watch can do anything a low-end Palm can do — for $200 to $300.

Right: The Microsoft SPOT watch uses the FM spectrum to receive data — stock quotes, sports scores, weather. Both go on sale this year.

Rardson, Texas, will never be found on a list of the world's style capitals. But for Fossil, this is home. The smell of rawhide wafts from a glass-walled room in one wing of headquarters – a cavernous 200,000-square-foot office building, design center, warehouse, and distribution hub. The entire place is festooned with belts, wallets, purses, and handbags in dozens of patterns and colors, and is, of course, crawling with watches.

Fil's original name, Overseas Products International, hints at the company's genesis. It was a kink in the watch industry supply chain – not some design epiphany – that brought the watchmaker to life. In 1984, Kosta Kartsotis was a purchasing manager for Sanger-Harris, a department store chain in Dallas. Swatch watches were the hottest fashion accessories on earth at the time. But department stores loathed Swatch's Swiss parent company for mandating which styles retailers could sell when. Kartsotis knew there was money to be made by listening rather than dictating.

Ka's younger brother, Tom, went to Hong Kong and came back with three new lines: two Swatch-style models and a retro-looking watch the brothers dubbed the Fossil, their nickname for their father. The market for modern-looking timepieces was saturated by Swatch, but the retro model sold briskly. So the brothers dumped the laggards, commissioned a half-dozen more throwback styles, and changed the company's name to Fossil Inc.

Nteen years later, Fossil has distilled that adaptive approach into a science. In addition to its own line and subsidiary brands Abacus and Relic, the timepiece titan designs and sells watches for DKNY, Emporio Armani, Diesel, Disney, and Philippe Starck. The company's feedback-driven retailing system allows it to tailor each line almost instantly to shifts in taste and demand.

Fthe namesake brand, head designer Tim Hale, a 15-year Fossil veteran, conducts style-scouting trips as far afield as Tokyo and Eastern Europe. But the ultimate determination takes place at the cash registers. Every week, Fossil combs sales reports, keeping track of which models (SKUs, in industry parlance) are selling best. The company overhauls its 500-model product line five times a year.

Iem>Blind Watchmaker</emthor Richard Dawkins classifies watches and other mechanical items as biological creatures. Fossil's methodology works like high-speed evolution – the strong creatures flourish, multiply, and evolve, while the weak wink out of existence. "You get the bottom 20 percent out of your inventory as fast as possible – into outlet stores, whatever," says Barnes. "You let the middle 60 percent sell through and you keep an eye on them. The 20 percent that are on fire, you figure out how to make those have babies."

Fil will always be a fashion-first company, but hiring the tech-obsessed Brewer helped bring out its geek aspirations. Fossil purchased the patent for a color-changing mechanism that Brewer developed in grad school and hired him as a consultant to help apply the patent to watch faces. The result, known as the Kaleido, was Fossil's biggest seller in 1999. Meanwhile, Fossil executives were considering an idea to put a palmtop in a wristwatch. The Kartsotis brothers again turned to Brewer. He went to work full-time on a progenitor of the Palm PDA watch, known as the FX2001. It failed because, among other things, it was too big. But it taught Brewer important lessons about design.

WBrewer's new and improved lines, Fossil is trying to bring technology products into an untapped marketplace – lifestyle retailing. Nordstrom, Nieman Marcus, and Macy's aren't places you'd normally go gadget shopping. Such service-oriented retailers require a large markup to survive, which is tough to justify when warehouse-like CompUSA is selling the same product next door for 20 percent less. Fossil's answer: Give the lifestyle retailers something different. A low-end version of the PDA watch, under the Abacus brand and running about $200, will go to outfits like Best Buy, while a more fashionable, upmarket Fossil version will sell for $300 next to the high-style timepieces at Macy's. The SPOT watch will also be peddled under the Fossil, Abacus, and Philippe Starck brands – depending on the venue.

Tmultitiered merchandising strategy makes high-end retailers feel like they have customized products – the key to success in the fashion biz. "The companies that fail in fashion and apparel are the ones that show up and say, 'This is what you need to sell,'" Barnes says – a pretty fair description of how things work in electronics. "You have to become partners with your retailers. You have to actually test stuff in the marketplace and take your direction from there."

Tpaths that led to Fossil's two new lines started 1,700 miles apart. The PDA began in Brewer's Fossil office in 1999, when he licensed a read-only version of the Palm OS from Palm Source and tried to make it work in a watch. The Microsoft project was hatched in Redmond in mid-1999. A year later, Microsoft engineer Bill Mitchell brought the idea to Fossil.

Mhell had just finished work on the scheduling software for Timex's DataLink watch, which imported data when held up to a PC monitor. Mitchell figured he could improve the DataLink by replacing the PC with a wireless transmitter. But that meant getting involved in hardware development, which would take money. He commissioned a concept video and showed it to a focus group, which loved the idea. He drew up a business plan and presented it, along with the focus group results and the video, to head of research Rick Rashid and Gates. He got his seed funding.

Tidea behind Mitchell's watch is simple: Each FM station has an extra bit of room on its frequency capable of carrying data at a low throughput rate, about 12 kilobits a second. SPOT takes advantage of that extra bit of bandwidth to deliver information that a user would want – stock quotes, sports scores, weather, and of course, the correct time. Seiko tried something similar in 1994 only to realize that it couldn't get watch-sized receivers strong enough to pick up the signal. A half-dozen years later, that was no longer a problem.

Rer than spend millions in marketing dollars to persuade people to buy a Microsoft watch, Mitchell sought out a fashion partner. On his first visit to Fossil, he was impressed with the company's design obsession, right down to the way it had turned a sprawling office-park box into a stylish building. Mitchell says the wood-and-steel staircase behind the receptionist helped convince him to choose the company as a partner. "A few of the design guys we met at Fossil had come in on a couple of weekends and varnished that stairway themselves," he says. "Just because they wanted that look."

Iate summer, Mitchell hosted his seventh focus group, this time with real SPOT watches. They tested well, but the refining was just beginning: To date, Microsoft has convened more than 50 SPOT focus group panels nationwide.

We Mitchell was considering Fossil as a SPOT partner, Brewer was focusing on the first version of his PDA watch, the FX2001. By the summer of '99, he knew it was going to be big – too big. Decades of watch retailing show that the outer limits of watch size are as follows: 50 mm from top to bottom (the size of an average man's wrist), 40 mm across the face, and 15 mm thick, to allow a shirt cuff to slide across the watch without snagging. That's 30,000 cubic millimeters. Any more and a watch becomes, in Brewer's words, "a novelty or an outright joke."

TFX2001, with its hobbled Palm OS, was ready in time for Comdex 2001, which is not to say the world was ready for the FX2001. At 60 by 47 by 16 – almost 45,000 cubic millimeters – it looked like the top half of a cell phone glued to a watchband. Brewer's cocky grin fades when he talks about how the wrist PDA was received at Fossil headquarters. "The term 'boat anchor' was used a few times," he says.

Twatch was bad, but not as bad as the timing. Brewer's second meeting with Mitchell was approaching. The FX2001 didn't exactly impress Microsoft. "It was massive," Mitchell says. "We took a look at that thing and said, 'Hmmm '" In the meeting, Brewer managed to convince Mitchell that the size was his suppliers' fault.

Eso, Brewer knew he needed help. Right around this time, he heard that Microsoft had turned to Flextronics to work on the design, materials procurement, and manufacturing of the Xbox. If Flex could handle the Xbox, he reasoned, it could handle his project. Brewer called Flextronics VP of design Malcolm Smith, who welcomed the idea as potential relief from the doldrums of the telecom recession.

Mntum on both projects began building last spring. By 2002, Microsoft had chosen three watchmaker partners: Citizen, Suunto, and Fossil. And Brewer got the green light to give his PDA watch another try. The biggest struggle – other than that he wanted it before Comdex – was over dimensions. "We would tell him, 'Look, we really need an extra tenth of a millimeter over here,'" says Bill Wrightson, Flextronics' lead engineer on the project. "Once in a while he'd say, 'I can give you a twentieth,' but most of the time he just wouldn't budge."

Bid-July, Flextronics had decided on a processor and a battery. Then came the display. The smallest screen available was 90 by 126 pixels – a cell phone screen. The Palm OS is written for a touch-sensitive 160- by 160-pixel screen. Rejiggering the software to work on a screen with fewer pixels would mean months of rewriting code. Flex talked to dozens of suppliers, but not one could shrink a display to a quarter the size of a standard PDA screen. Finally, in July, Flex found an Arizona engineering firm called Three-Five Systems that agreed to have a prototype ready before Comdex.

Oeptember 6, the screen prototype arrived. The Palm icons were clear. The address book listings were legible. The resolution was far sharper than Brewer or Wrightson had dared to hope. But the exultation degenerated into panic. The first set of hand-tooled aluminum watch cases arrived from Fossil's supplier in China. Some of the function buttons didn't match up with the corresponding internal leads. Worse, the interior cavities of the cases were half a millimeter too small. "That kind of variation had never been a problem for Fossil before," Wrightson says. "In this case, it was a disaster."

Tdesign teams dug into the cases with power drills, carving aluminum from each casing one tiny plug at a time until there was enough room for the module. The day before Comdex began, Wrightson drove to the nearby UPS office and sent a dozen prototypes, all with their charge wires hanging out, to Brewer's hotel.

Tphrase "wearable technology" seems as much an oxymoron as "acceptable toxin levels." Technology, it suggests, is inherently unwearable. In fact, some rudimentary versions of the Dick Tracy watch already exist. Xact Communications makes a bulbous wrist-mounted walkie-talkie. Samsung has a cell phone prototype that looks like a silver-plated Tonka toy with a wristband. Both violate the 30,000-cubic-millimeter limit and so are fated to end up with Seiko's pager-watch and Brewer's boat anchor in the Museum of Misguided Gadgetry.

Iny company has a shot at getting people to wear technology, it's Fossil. Tech hardware makers tend to sell their products like office furniture or, well, like hardware. This works in CompUSA and Good Guys, but fashion retailers depend on showmanship to move merchandise. That means manufacturers must play the role of producer in the shows that feature their wares.

Iossil's retail relationships, the magic happens backstage. Stores rely on a relatively simple formula to allocate display space among various brands: The faster an item sells, the more space it gets. So, Fossil makes sure retailers get the proper information in a timely manner. Five times a year, field reps huddle with retail buyers and share insight from the sales reports. The numbers provide a map of which styles, colors, and features are likely to move in coming months. The projections help retailers make purchasing plans while Fossil shapes new styles. As long as the projections remain accurate, Fossil's watches move faster than other brands, and Fossil gets more space.

Iight of the "millions of dollars" Fossil has invested in the new lines, Barnes says Fossil will temporarily suspend the rules that dictate cutting slow-selling SKUs. They will be given a grace period to catch on. But Brewer doesn't think he'll need the favor. "Our retailers ask, 'How can we compete with Best Buy?'" Brewer says. "The same way they can move our $300 Emporio Armani watch side by side with a $65 Fossil that has the same mechanism inside."

Bes adds that the retailers are as excited to be dabbling with technology as vice versa. "We're giving them a new category," he says. "They see these as watches with new functionality, not electronics functionality crammed into a watch."

W/em one? The wrist remains the one body part upon which humans have historically proven enthusiastic about carrying information technology. Processors and storage keep getting smaller, more powerful, and cheaper. If Fossil can fuse its fashion sense and market sensitivity with tech functionality, you will. And when you do, "Dick Tracy watch" will vanish from the lexicon.