Fitbit's long-term sustainability and the abandonment issue

• 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.

Competition landscape

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