Fitbit's long-term sustainability and the abandonment issue
By Edwin Yapp August 25, 2015
- Needs to be more than just an innovative hardware player
- Should go beyond fitness and towards holistic health services
ANALYSIS FITBIT Inc remains the darling in the fitness tracker space – at least for now, with industry and financial analysts remaining cautious over its long-term prospects in the fledging world of wearable technology.
Founded in San Francisco by James Park and Eric Friedman in 2007, the fitness wearable technology company is a pioneer and the leading player in the market.
It says its mission is to empower and inspire people to live healthier active lives, helping them to achieve their health and fitness goals, whatever they may be, with the products it designs.
Citing numbers from research firm NPD Group, Fitbit claims market leadership in the fitness tracker segment with about 85% share of the US market in March 2015, up from 67% in the same period in 2014. Its revenue more than tripled in the quarter through March 2015, from a year earlier, and earnings are also rising fast.
Fitbit also claims to have nearly sold 21 million devices as of March this year, saying that its products have also helped users take 43% more steps which they would otherwise not have taken.
In June, it listed on the New York Stock Exchange, opening at US$30.40 a share, up 52% from its initial offering of US$20, according to Fortune. Its share price peaked at US$52 on Aug 5 but has currently slipped below the psychological threshold of US$40 to about US$39.
Meanwhile, its first earnings call after listing was generally greeted well by analysts, as key numbers beat their expectations.
For the immediate closing quarter, revenue jumped 253% to US$400 million, well ahead of analyst estimates about US$319 million. The company saw particular strength abroad, where sales jumped 250% year-over-year, according to Forbes.
Overall net income came in at US$51.3 million, or 21 cents per share, compared with US$18.3 million or nine cents per share a year ago – this was also higher than analyst estimates of eight cents per share.
Fitbit’s forward guidance also remains bright, with projected full-year earnings of 69 to 77 cents per share and revenue of between US$1.6 billion and US$1.7 billion.
Things are looking bright, with research firms NPD Group and Counterpoint Research all forecasting growth in the market for fitness tracking wearables in the coming years.
NPD Group noted that in less than a year, awareness of wearable fitness devices among US consumers has more than doubled, going from 30% in November 2013 to 70% at the end of July 2014.
Counterpoint Research meanwhile expects the wrist wearables market to grow from 20 million units in 2014 to 59 million units in 2015.
But as rosy as all this seems, there are speed bumps ahead that could hurt Fitbit’s potential for growth in the longer run, according to analysts.
One challenge is competitive pressure from rivals. At the top of the scale are giants such as Apple Inc, whose Apple Watch made its debut in March. At the bottom of the scale is Xiaomi Inc’s Mi Band, which retails for a mere US$13.
Between the two extremes are niche brands such as Nike, Adidas, Jawbone, Misfit, Moov, Jaybird, Withings, Garmin, TomTom, Samsung and even Microsoft.
Neil Shah, research director at Counterpoint Research, says that the penetration of fitness trackers is still very low, and while there are opportunities for Fitbit to grow its market share, it will find it difficult to keep charging a premium for just its hardware if there is no significantly different value bundled with it.
“The biggest advantage Fitbit has is its strong data analytics – its cloud platform and the entire science of fitness and health monitoring, analysis and its ability to design newer revenue opportunities and segments,” he says in reply to Digital News Asia (DNA) queries.
Fitbit however remains unfazed, saying it believes that it still retains a significant advantage over the competition – something that is causing consumers to choose Fitbit over the rest, a senior executive told DNA.
The second and more challenging battle for Fitbit is that the business now is still too focused on hardware, according to Shah.
Arguing that its overall business model approach needs to pivot from being a hardware company to being a data science company, Shah says Fitbit can disrupt the healthcare industry with well-designed products supported by a robust service and strong analytics engine.
Concurring with this view was Jason Cipriani, a freelancer columnist for Fortune who says that one way companies like Fitbit will be able to thrive is to go beyond just activity tracking.
“For instance, a review of the company’s latest bands, the Surge and Charge HR (heart rate), found both products provide great fitness services, but fell short in everyday features like Internet capabilities, an element that could entice more users to try out the product,” he says.
“Apple, on the other hand, has released a smartwatch capable of both tracking activity and monitoring heart rate, along with running other applications like email, and providing information at a glance.
“The only downside for Apple, and a boon for Fitbit’s cause, is that the entry price of the Apple Watch starts at US$350 and locks users into using an iPhone,” says Cipriani.
Similarly, Ed Maguire, a software analyst at CLSA, was quoted in Bloomberg as suggesting that Fitbit should follow Apple’s model of letting third parties create apps for its devices.
“If Fitbit can manage to become a platform and be able to support innovations from third parties, I think that would be a really viable road to creating more sustainable value,” he says.
Next: 'Abandonment' issues
As daunting as the competition can be, some analysts believe that the stiffest challenge Fitbit faces has more to do with human nature than technology: Consumers are abandoning their fitness trackers a short time after purchase.
In its July 10 edition, The Atlantic cited a number of reasons why people gave up on their fitness trackers, including the novelty of fitness trackers wearing out; the devices not providing enough meaningful information; and the difficulty in recording the right kind of exercises.
A recent study (registration required) by research firm Endeavour Partners suggests that roughly a third of trackers get abandoned after six months.
And a report (subscription required) in the Journal of the American Medical Association (JAMA) reveals that more than half of the people who buy fitness trackers ultimately abandon their wearables, while a third of them actually stop using their devices within six months.
Fitbit is aware of this abandonment. Before its listing, the company acknowledged that only half of its 19 million registered users (as of March 2015) qualify as active users. This suggests that Fitbit and other fitness tracking companies are struggling with user abandonment rates.
Even cofounder Park, also its chief executive officer, acknowledged this challenge to Fortune, saying that his solution is to “further integrate the devices into the lives of users by adding a host of peripheral, but often requested, features such as text messaging.”
Asked by DNA how Fitbit is dealing with the abandonment challenge, Steve Morley, vice president and general manager of Fitbit, disputes the numbers cited by Endeavour Partners as “outdated and inaccurate.”
He however did not respond to the data cited by JAMA.
“As of March 2015, we have sold 20.8 million devices,” he tells DNA via email.
“We intend to maintain and extend our position as the leading platform for connected health and fitness … the referenced [Endeavour Partners] report is outdated and is not solely focused on Fitbit, therefore we do not believe it provides an accurate picture of engagement or user numbers,” he adds.
Morley also says that Fitbit continues to grow significantly and as of March 2015, had 9.5 million active users on its platform.
Pressed further as to how Fitbit plans to grow and maintain its market leadership, he says, “We will continue to build our active user base by enhancing the user experience through health and fitness data and personalised insights, and selling additional devices to existing users through upgrades or complementary devices as users become more active.
“We will also inform users about new offerings and premium services and increase user engagement on the platform through motivational and social features,” he adds.
Analysts weigh in
Senior technology specialist Evan Niu (pic), writing for The Motley Fool, notes that while Fitbit has 9.5 million active uses out of 19 million registered users, the potential risk still is that a large portion of customers who register an account eventually become inactive.
“In a worst-case scenario, their Fitbit device sits in a desk drawer somewhere gathering dust. As negative as that may be for a person's health, it also carries a specific risk to Fitbit's long-term business prospects,” the analyst for the financial investment website writes.
And while Fitbit is trying its best to entice active users with its premium subscription service as Morley says it would, Niu notes that less than 1% of revenue comes from subscription services, Fitbit said in the prospectus it filed with the Security and Exchange Commission.
As for its claim that abandonment rates aren’t as accurate as reported, Niu notes that another more recent study by Robert W. Baird & Co suggests similar numbers to what Endeavour Partners and JAMA have noted.
Still, Niu believes that Fitbit can still have better long-term prospects despite these challenges, arguing that the market for fitness trackers is still in its early adoption stage and the potential is still there.
“As the market matures, some of the adopters will fall off, but there will always be an addressable market of fitness enthusiasts that isn't going away any time soon,” he says.
“This subset may be a niche compared with the mainstream, but chances are it’s a very passionate niche that’s willing to invest in fitness.”
Meanwhile, Fitbit will gladly sell a device to anyone, even if that person ends up abandoning the product, he ventures.
“But over time, I would expect Fitbit to focus its efforts on this crowd of enthusiasts where it can very likely count on recurring upgrades to premium products with higher margins,” Niu says.
He also believes Fitbit will upscale its products and push higher-end, greater-margin products such as the Charge, Charge HR and Surge, as nearly 80% of its revenue comes from its three most expensive products.
“As the product mix shifts higher, average selling prices and margins tag along for an uplift,” he says.
JP Gownder (pic), principal analyst at Forrester Research, argues that one of the biggest opportunities for Fitbit lies in its business-to-business-to-consumers (B2B2C) segment, meaning that it sells through insurance companies, hospitals, and corporate wellness programmes.
“This is a huge channel for them, and the interest here is growing,” he tells DNA via email.
“In April, John Hancock Life Insurance in the United States announced that it would give Fitbit devices to customers, who can earn up to 15% discounts on their life insurance rates, as healthier people mean a lower risk pool,” he notes.
Gownder also suggests Fitbit license its software to other players, and partner with other wearables such as smart clothing, which have both B2C and B2B applicability.
Asked about the problem of abandonment, he says that Microsoft Corp’s approach for its Band merits consideration, as rather than telling people fairly basic information (like the number of steps they take), its Health app aims to connect to one’s life in a more holistic way.
“For example, it could look at your calendar and tell you ‘every day that you meet with your boss, you have a stressful day (as evidenced by galvanic skin response). So tomorrow, if you have a meeting with your boss, go for a morning run and avoid coffee, and you’ll have a better day’,” he says.
Counterpoint Research’s Shah sums it up this way: “Move away from just being a hardware company. Strengthen the core software, cloud and analytics to offer a service that is unique, accurate and differentiated … and above, all life-changing.
“Good software user experience and meaningful service-centric offerings will be the key differentiators for Fitbit,” he says.
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