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Summary

Fitbit has announced that it will be laying off 110 employees (6% of its workforce) due to shortcomings in its 4Q16 earnings. The projected target listed in its 3Q16 earnings report aimed for revenue generation of $725m to $765m, but fell short to just below $580m. Fitbit cited its lack of sales in mature markets as a main issue. Investors were not initially satisfied with Fitbit's original 4Q projections so the actual revenue numbers will further harm Fitbit's industry reputation, perceived market dominance, and stock. Fitbit's CEO has stated that the company plans to move into smartwatches in order to expand its product portfolio and capture a larger share of the wrist-worn wearables market.

Fitbit needs to capitalize outside of hardware

The implications of Fitbit's 4Q debacle creates some uncertainties in the wearables market. The wrist-worn wearables marketplace is getting overcrowded with both established and emerging vendors, the products are getting increasingly commoditized, and potential repeat users are moving away to different types of wearable products (body bands, smart apparel, hearables, etc.). As was highlighted in Ovum's Fitbit case study published in November 2016, the key to the success of a wearables company is to grow the business outside of hardware through biometric data monetization, companion application advancements and expansion, advanced analytics, and actionable recommendations via personalized coaching.

Although Fitbit has supplemented its existing business with premium memberships and corporate wellness programs, the vast majority of its revenue still comes from the sale of its devices. The company's plan to enter the smartwatch market could be considered as "too little, too late" and will be insufficient to drive revenue growth in 2017. Competition in the smartwatch market is fierce with tech companies such as Samsung and Apple operating on much larger marketing and R&D budgets. For Fitbit and other companies in the wrist-worn wearables space, activity band and smartwatch hardware will soon prove not to be a reliable and sustainable source of revenue on its own. Instead, consumers see value in products that have sophisticated companion applications to help them realize their fitness and wellness goals. Fitbit needs to invest in refining its basic and premium application software (i.e. expansive analytics and actionable recommendations) to maintain consumer loyalty and aftermarket revenue streams. Furthermore, the company should look to engender a stronger network effect via an improved and multifaceted digital social interaction for users.

Other areas of growth for Fitbit are corporate wellness programs and the sale of anonymized biometric consumer datasets, especially because not many wearables competitors have such an extensive set of users.

The implications of Fitbit's performance woes will be felt across the entire wearables industry because it affects investors' confidence in this new segment. According to Ovum's Wearable Devices Tracker, 35% of wearable products come from privately funded start-ups.

Appendix

Further reading

The Future of Fitbit: Finding Revenue Streams Outside of Hardware, TE0004-001121 (November 2016)

Wearable Devices Tracker: 3Q16, TE0004-001131 (November 2016)

Author

Rishi Kaul, Analyst, Consumer Technology

rishi.kaul@ovum.com

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