From Fitbit vs. Apple Watch: Evolution and Competition in the Wearable Market
On August 27, 2015, the internationally renowned market research firm IDC released a report stating that global wearable device shipments reached 18.8 million units in the second quarter, representing a year-on-year increase of 223.2%. Notably, Apple Watch shipped 3.6 million units in the second quarter, securing the second-largest market share in the wearable device sector, just behind Fitbit’s 4.4 million units.¹
Table 1: Comparison of Shipment Data for the Top Five Players in the Wearables Industry (Unit: Million)
Source: IDC Worldwide Quarterly Wearable Device Tracker, August 27, 2015
In the report, IDC stated, “It should be noted that Fitbit only sells basic wearable tracking devices, namely smart bands. And"In the coming years, this type of smart wristband will gradually lose market share to more feature-rich smartwatches. As a result, Apple is poised to become the next leader in the global wearable device market."²
Although Fitbit has maintained a high growth rate in terms of volume alone, with a 158.8% increase compared to the same period last year, data comparison indeed reveals that,The launch of the Xiaomi Band and Apple Watch had a significant impact on Fitbit.As clearly shown in the data from the chart below, Fitbit’s market share grew rapidly starting in the second quarter of 2014, peaking in the fourth quarter of the same year at nearly 50%. However, in the first quarter of 2015, Fitbit’s market share declined significantly due to competition from Xiaomi, falling to 34.2%. With the launch of the Apple Watch, Fitbit’s market share further dropped to 24.3% in the second quarter of 2015, only slightly higher than the Apple Watch’s 19.9%.
Data Source: Analysis of IDC Data
▌Locked-in Mode Has No Impact on the Short-Term Development of Apple Watch
Although public opinion currently holds the general view that,It is only a matter of time before Fitbit is overtaken by the Apple Watch,³However, a careful comparison of the features of the two products reveals a high degree of homogeneity; therefore, the key distinction between them lies in their approaches to business model integration.This is also the core factor in judging the future development of both.4
The main features of the Apple Watch in sports and health include: step counting, calorie expenditure tracking, stand time recording, sedentary reminders, and heart rate monitoring.
Fitbit’s product lineup centers on six wearable devices, with the specific features of each model illustrated in the figure below:5
Source: Fitbit Prospectus
In terms of business model integration approaches,The biggest difference between the Apple Watch and Fitbit is that the Apple Watch’s features require an iPhone or iPad to function, as there is no independent platform to support the operation of the Apple Watch itself. This means thatThe Apple Watch is locked into Apple’s ecosystem, so its potential growth is directly constrained by the iPhone and iPad. Given considerations of portability and real-time communication, the trajectory of the iPhone will be the most significant limiting factor for the Apple Watch.
According to the latest data released by IDC,6In 2015, iPhone shipments stood at approximately 223 million units, with an estimated market share of 15.6%. In terms of volume alone, the iPhone’s scale is more than sufficient to support annual Apple Watch shipments of around 10 million units. Furthermore, based on 2019 forecasts, even if the Apple Watch maintained a 100% year-over-year growth rate, reaching 160 million units in shipments, this figure would still fall far short of the iPhone’s 269 million units.
Table 2: Smartphone Shipments (in millions) and Market Share
Source: IDC Worldwide Quarterly Mobile Phone Tracker, August 25, 2015. (Note: Data marked with an asterisk are IDC’s forecasts.)
Although public opinion suggests that declining product quality and lackluster innovation in iPhones will lead to a drop in sales and user stickiness,7In particular, sales of the upcoming iPhone 6s may experience a significant decline.8However, the Apple Watch relies on Apple’s entire ecosystem, rather than a single product like the iPhone 6s. Therefore,In the short term, a slight decline in iPhone sales will not directly hinder the development of the Apple Watch, as the hundreds of millions of Apple users accumulated over previous years can serve as potential customers for the device. This substantial user base is sufficient to support the short-term growth of the Apple Watch.
▌Core Issue: Low User Stickiness
According to a report published in JAMA in February 2015,9The issue of low user stickiness for wearable devices is very prominent, with more than half of users eventually choosing to abandon the use of their purchased wearable devices, and one-third of users stopping the use of their devices within six months after purchase.
In fact, Fitbit’s development trajectory corroborates the findings of the JAMA study.Prior to its initial public offering, in March 2015, Fitbit publicly acknowledged that only about half of its 19 million registered users were active.According to Rock Health's analysis,10The issue of high user churn may be even more severe in Fitbit’s products than this figure suggests.
In its prospectus, Fitbit’s disclosed data did not clearly indicate the number of stable daily active users (DAUs) and monthly active users (MAUs). However, Fitbit introduced the metric “Paid Active Users” (PAUs) to address concerns regarding user engagement. PAUs are defined as users who have performed any one of the following actions within the past three months:
Subscribed to Fitbit Premium11or FitStar12；
A tracker or scale paired with a Fitbit account;
Login recorded 100 steps;
or logged a weight measurement.
In its prospectus, Fitbit used the ratio of Premium Active Users (PAUs) to Registered Users (RUs) to illustrate user engagement on the Fitbit platform (with a higher ratio being more favorable). As shown in the chart below, the PAU/RU ratio was 46% in 2014 and increased to 50% in the first quarter of 2015 (see the chart below).
Image source: Rock Health Report
In its report, Rock Health questioned the validity of Fitbit’s PAU/RU metrics. Rock Health pointed out that examining Fitbit’s data from another, more intuitive perspective—namely, by analyzing user churn rates—may provide greater insight into issues of user stickiness.Churn Value refers to the change in PAUs subtracted from the total number of devices sold during the same period, under the assumption that buyers of these devices become active after purchase and serve as the primary drivers of new PAUs.From the perspective of user churn (see figure below), Fitbit lost 6.8 million PAUs in 2014, of which 2.5 million were PAUs acquired before the end of 2013. According to Fitbit’s methodology, PAUs are measured on a quarterly basis; therefore, PAUs from the fourth quarter could not have churned by the end of 2014. Consequently, the remaining 4.3 million must have originated from new users acquired during the first three quarters of 2014. Given that Fitbit’s sales volume for the first three quarters of 2014 was approximately 6 million units, this implies thatIn the first three quarters of 2014, more than 70% of Fitbit buyers had churned by the end of that year.
Image source: Rock Health Report
Due toFitbit's business model relies on device sales., therefore, the repeat purchase rate of users is crucial. Although Fitbit's total sales volume is growing rapidly, a noteworthy issue is that the repeat purchase rate among Fitbit users has begun to show a significant decline.The repeat purchase rate can be estimated using the ratio of the cumulative total number of devices sold to the total number of registered users:According to current data, this figure has been steadily declining despite an overall increase in device sales volume, dropping to 1.09 in the first quarter of 2015. This indicates that, on average, each user currently owns only one Fitbit device, and a significant number of existing users are not opting to purchase new devices during product upgrades. In contrast to other consumer electronics cases—Apple being the most typical example, where fans eagerly rush to buy new releases—this metric suggests from another angle that Fitbit’s user stickiness is not at a high level.
As the Apple Watch has just been launched, there is currently insufficient data to reflect trends in its sales volume, making it impossible to infer user stickiness and churn rates. Due to screen size limitations, the Apple Watch’s advantages in app functionality are constrained, with its core competitiveness remaining focused on sports and health-related features. In light of Fitbit’s performance, whether the Apple Watch can overcome the user retention challenges common to wearable devices requires further market data for validation.
▌Fitbit's Transformation?
The above data clearly indicates that, without transformation, Fitbit’s current business model, which relies primarily on hardware sales, will face severe challenges in the short term.In addition to hardware sales, Fitbit’s performance in value-added services has also been underwhelming. A more telling metric is that revenue from Fitbit Premium and FitStar subscription services accounts for less than 1% of the company’s total revenue.13According to the financial data in the prospectus, Fitbit’s total revenue in 2014 was $745 million. This means that in 2014, Fitbit generated only $7.45 million in value-added service revenue from its 6.7 million active users, amounting to just $1.11 per user.
Although Fitbit emphasizes new products and additional features and services as its top two growth levers, while identifying brand awareness, global distribution, and corporate wellness as other key growth opportunities, it has not provided clear indications regarding development in technical capabilities. Despite allocating approximately 7% of its revenue (slightly less than 10% of its advertising expenditure) to research and development, existing information makes it impossible to determine what strategies and actions Fitbit will pursue with these other growth levers beyond hardware sales. Even more uncertain is the extent to which the growth potential of these levers can be realized.
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