What management did not realize at the time was that Fitbit was beginning to feel the consequences of one giant mistake that Park had made years earlier. Park did not foresee the fundamental change that would take place on the wrist in the form of dedicated fitness trackers turning into full-fledged computers. Smartwatches aren’t just gloried fitness trackers. Instead, smartwatches are alternatives to smartphones and tablets.
After dragging his feet for far too long, Park knew that the only way forward for Fitbit would be to come out with a smartwatch. With the $300 Ionic, Fitbit launched its first smartwatch in 2017. The device flopped. Fitbit quickly pivoted to a lower-cost smartwatch with the $200 Versa. Once Fitbit had established channel inventory and satisfied pent-up demand for the Versa in its existing installed base, demand evaporated. Despite an even lower price, the Versa has failed to catch in the marketplace.
Why Sell?
In early 2019, Fitbit management began waving the white flag when it decided to pivot yet again, this time into services. In an effort to grab more users who could be monetized via paid services, Fitbit management began to cut into hardware pricing and margins. With the all-important 2019 holiday shopping season quickly approaching, Fitbit’s situation looked dire. Enter Google last week to officially put Fitbit out of its misery.
The only alternative for Fitbit, which was far from unproven, would be for the company to become a much smaller company, essentially a shell of its former self, in order to sell a certain number of dedicated fitness trackers each year to a declining installed base. Even if successful, Fitbit would have looked and acted like nothing that the world had come to know Fitbit as - a leader in the wearables category. Fitbit would instead become something of a zombie company.
How did Fitbit go from being considered the wearables leader to viewing a $2.1B acquisition as its best hope for shareholders to recoup any value? What led Fitbit to run out of options as an independent company?
Two words: Apple Watch.
Redefining the Industry
Apple didn’t just steal customers away from Fitbit. In such a scenario, Fitbit may actually have had a chance to survive as the company could have had a means to respond competitively. Apple ended up doing something that ultimately proved far worse for Fitbit. The Apple Watch altered the fundamentals underpinning the wrist wearables industry. This left Fitbit unable to remain relevant in a rapidly-changing marketplace.
Apple placed a bet that wrist real estate was being undervalued. The Swiss had dropped the ball and were primarily selling the wrist as a place for intangibles with high-end mechanical watches. Instead of following Fitbit and selling a $99 dedicated fitness tracker, Apple looked at the wrist as being a great place for additional utility beyond just telling time or tracking one’s fitness and health. Apple turned health and fitness tracking from a business into a feature. The Apple Watch redefined utility on the wrist.
This change led to consumers wanting more from wrist wearables. Apple Watch established a stronghold at the premium end of the market. Taking a page from its product strategy playbook, Apple then methodically began to lower entry-level Apple Watch pricing, which had the impact of removing oxygen from increasingly lower price segments. Fitbit was squeezed as the company had no viable way to compete directly with Apple Watch. Fitbit’s existing business wasn’t profitable enough for management to ramp up R&D in an effort to go up against Apple. Fitbit had generated just $200M of free cash flow over the past five years. Apple spends that much on R&D in a few days. Meanwhile, competition remained intense at the low-end of the market, which only added pressure to Fitbit’s existing business of selling low-cost dedicated fitness trackers.
Exhibit 2 highlights the number of active Fitbit users compared to the Apple Watch installed base (the number of people wearing an Apple Watch). The Apple Watch figures are my estimates. The exhibit ends up being the most damning evidence of Fitbit’s demise. Fitbit’s installed base lost all momentum just as Apple Watch began to take off. Unit sales trends continue to hide this deterioration in Fitbit’s installed base fundamentals. While Fitbit claims to have 28 million active users, that total isn’t enough to sustain a thriving ecosystem. In addition, there are valid reasons to question the loyalty and engagement found with those users.
A good argument can be made that Fitbit died a while ago, and the company is merely running on fumes from the dedicated fitness tracker glory days. With Fitbit, Google is acquiring a dying wearables platform.
Exhibit 2: Number of Active Users (Fitbit versus Apple Watch)
