1FITBITAuthor: Alan N. Hoffman and Natalia Gold• Publisher: Rotterdam School of Management, Erasmus University• Original publication date:2019• Length:3,842 words• Region:Northern America~Northern Europe• DOI:http://dx.doi.org/10.4135/9781529760217Abstract:Fitbit was set to reinvent the wearable tech market. However, following a survey whichrevealed that the average customer discards the Fitbit device after only six months ofuse, the firm needs to find a new way to regenerate itself in an industry that is nowpacked with newly developing major technological fashion firms.IntroductionFitbit is a US-based company that operate within the fitness wearables industry,offering health and activity trackers that are used in conjunction with smartphones. Itsfirst mover advantage into the wearable industry attracted an $84 million venturecapital, which the firm eventually used to become a public company in 2015. Whileinitially intended for middle-aged women who were familiar with technology, by 2018Fitbit had expanded their target audience to both men and women aged 18–45,through partnerships with organizations such as the NBA, Adidas and Red Bull.Although the firm was one of the pioneers within the industry, and devoted 58% of itsemployees on Research and Development, Fitbit had to overcome the challenge issuethat consumers only used their products for 6 months, and lost interest; especially ina market where tech giants like Apple and Samsung were competing.Company BackgroundFitbit was started by Eric Friedman and James Park in San Francisco in 2007 with aninitial investment of $400,000 from its founders, their families, and friends. 2Fortuitously for all involved, it was a company that developed the right product at theright time at the right price point in a growing consumer industry in the first two decadesof the 21st century. 3 Fitbit’s innovation, wearable devices that tracked individuals’health and work-out data, 4 was an immediate and huge success. The company raised$84 million in venture capital before its IPO on June 17, 2015, and by 2018 had foursubsidiaries in the United States, one in United Kingdom, and one in Ireland.Borrowing from the Wii Nintendo gaming system that utilized motion sensors to trackmovements, Park and Friedman recognized that they could modify that technology toprovide a similar experience in a mobile package. Their goal was to integrate motionsensors into a wearable pedometer. In September 2008, they unveiled the Fitbit2Tracker at the TechCrunch50 conference where tech start-ups display new productsto an audience of investors, entrepreneurs, and the media.The Fitbit tracker was a clip-on pedometer that recorded calories burned, steps taken,distance traveled, and intensity of activity. It was equipped with a motion-detectingsensor known as an accelerometer to record patterns and track movement. It was thefirst product unveiled by the company and it took almost a year and 25,000 preordersfor the company to ship their first batch.After the launch of the Fitbit tracker, the company developed a range of productstargeting different segments of the market. With each new product, the company madeit easier for people to move, count steps, track their fitness trends, challengethemselves, and share with others while earning badges, making the company themarket leader in portable digital fitness and health technology. 6 Over the course often years, Fitbit developed the institutional knowledge to produce scalable products,patenting a sizable number of original devices. In addition, the company’s emphasison data collection helped distinguish it from its competitors. All Fitbit devices focusedon three areas:• Basic monitoring of steps and activity, calories burned, floors climbed,clock/time, sleep tracking & silent alarm, sleep stages, female health tracking• Exercise features including smart track, reminders to move, swim-proofing,multi-sport tracking, heart rate tracking, cardio fitness levels, on-screen workouts,built-in GPS, and connected GPS.• Smart features including call and text notifications, quick replies, calendaralerts, apps, store music, makes payments, music control, and guided breathingsessions.Fitbit differentiated itself from its competitors through premium design, and addedfeatures that allowed users to customize their Fitbits according to their ownpreferences, building up a loyal customer base. The only problem was that mostpeople only used their Fitbits for an average of six months, then lost interest, a majorchallenge for Fitbit.The leading manufacturer of wearable activity trackers, Fitbit, captured 60% ofwearable technology market share in 2017, garnering $1.6 billion in sales, even as itexperienced a decline of 30% in its return on equity that same year. In 2018 its marketcap was $1.276 billion. While Fitbit initially captured a 60% market share it had severalfierce competitors, especially Garmin Ltd and Xiaomi Corporation, and largercompanies with superior market valuation, such as Apple, LG, and Microsoft, that hadexpanded into the wearable technology market in the past few years. The UnitedStates constituted the largest market for wearable technology with 58% of industryrevenue, followed by Brazil and Germany.“Fitbit Culture: Don’t Sit, Stay Fit!”Fitbit’s vision was to help people achieve health, fitness, and a more active lifestyle bydesigning elegant, easy to use products that fit seamlessly into people’s lives to helpthem achieve their health and fitness goals. 8 As the market leader in connected health3and wearable technology, Fitbit’s main objectives were to solidify its leadershipposition by developing a range of products; expand into new markets through mergersand acquisitions; and work hard maintain its edge in an increasingly competitivesegment. Its latest round of funding yielded $43 million, and the company signaled itsintention to expand into Europe, the Middle East, Africa, and Asia-Pacific 9 which, alltold, only accounted for less than 20% of the industry revenue as late as 2018.From the beginning, Fitbit was committed to developing a range of reliable, lightweightcomputing devices and wearables that targeted different segments of the market. Tothat end, the company allocated a price to research ratio (the ratio measuring thecompany market value and R&D spending) that marked its commitment to innovation.This move was crucial for Fitbit in an age of radical innovation and technologicalbreakthrough heavily dependent on investment in R&D. For Fitbit to maintain itsleadership position, it had to focus on developing scalable products and costefficiencies to increase its market share and profitability.Fitbit also maintained its competitive edge by acquiring new companies includingPebble Technology Corp, manufacturers of smart watches in 2016, and Vector WatchLtd. (United Kingdom) in 2017, designer of wearable technology watches. RecentlyFitbit acquired Twine Health with 25 million subscribers, expanding its mission andreach to help people optimize their health across a full spectrum of concerns fromprevention to disease management.Most importantly, Fitbit’s integrative model created a loyal customer base by enablingdevices to wirelessly and automatically upload data onto the Fitbit website for users toaccess, establish an effective fitness program for themselves, and communicate withother users to collaborate on fitness plans and support each other in living a healthierlifestyle. Customer satisfaction through seamless integration and constant interactionwith a computing device created value for the company, boosting its competitive edgeby increasing its number of premium subscribers.Fitbit’s CompetitorsXiaomiXiaomi, a Fitbit competitor, designed simpler, less expensive devices to target lowend consumers. Its devices monitored steps, distance, calories burned, and heart rate.Its total shipments nearly doubled to 5.2 million in 2016, and its market share roseover six% to 15.2%, partly accounting for Fitbit’s revenue slump to 26% in 2016 in theAsia-Pacific region. 10 Even though Xiaomi offered a range of products with differentprices, the brand was not fashionable and its system did not provide insights into thedata collected, unlike the Apple Watch or Samsung.GarminMost Garmin smart watches also did not offer very advanced metrics. However, itsanalog watch with basic health tracking features was a great product for trackingactivities. Also, most of its products used replaceable batteries that lasted up to a yearand were water resistant. On the other hand, Garmin smart watches were big,4cumbersome, and expensive, plus the brand lacked sophistication and namerecognition, making it even less appealing.Apple, Inc.Apple recently entered the wearable technology industry with the launch of the Applewatch in 2015. In 2017, Apple reported Q1 2018 as the best quarter ever for the AppleWatch, with over 50% growth in revenue and units four quarters in a row, and strongdouble-digit growth in every geographic segment. Sales of Apple Watch Series 3models were also more than twice the volume of Series 2. 11 Apple Watches, pricedfrom $349 to $15,000, targeted a range of buyer segments, though the differenceswere largely aesthetic. The Apple Watch’s competitive advantage derived largely frombrand awareness and Apple’s loyal user community. However, many were critical ofthe Apple Watch because it only worked in sync with other Apple products, it wasexpensive, its battery life was very limited, and it did not have an altimeter to measurethe number of stairs climbed in a day.SamsungSamsung entered the wearables market in 2014 with the Simband, equipped with sixsensors and a modular design to track daily steps, heart rate, blood pressure, skintemperature, and sweat glands. 13 Samsung watches featured integrated GPS, aheart rate monitor, water resistance, automatic exercise recognition for certainworkouts, and sleep tracking in addition to basic all-day activity monitoring of stepstaken, calories burned, distance traveled, floors climbed, etc. 14 Samsung used its inhouse application, “S Health,” to monitor fitness and create seamless integration. Italso brokered an agreement with Spotify to let users download songs to SamsungGear so they could listen to music while out for a run without having to carry a phone.15 However, most Samsung products were expensive yet had limited customizationoptions and a short battery life, and were limited to connectivity with Android devices.Barriers to EntryEven just a few years ago, barriers to entry for the fitness tracker industry were low:any company with access to capital and tracking technology or software couldcompete, especially as there was little or no proprietary technology in fitness trackers,allowing for increased market competition. Fitbit’s early successful entry garnered astrong position with a 60% market share, while its integrated system made switchingcosts expensive. Analysts predicted that the wearable technology industry would beworth $5 billion by 2019: that plus the low barrier to entry spurred a number ofcompetitors to enter the fray over the past few years.Macro EnvironmentFitbit protected its products by trademarking them, and patented a number of itsinnovations, including sensors, devices, wristband cases, methods, and systems.Throughout its history Fitbit’s major competitors waged a patent war, constantly tryingto gain an edge through technological innovation, and making it crucial for Fitbit tomaintain its trademarks and patents to protect against the ruthless competitiveness ofthe wearables technology industry.5Nevertheless, Fitbit faced legal challenges. The company was sued twice for violatingpatents’ rules, by Immersion Corporation in 2017, 16 and Valencell in 2016 17 for itshaptic feedback technology.The company also had to recall its Fitbit tracker in 2014 after complaints to theConsumer Protection Safety Commission about some users’ allergic reaction whilewearing it. 18 These instances created negative PR for the company, threatening itsbrand. Customers had also become more aware of the downside of big data collectionand how companies collected and used their data, and wanted more transparency. Asthe laws governing data collection differed from country to country, Fitbit, operating in86 countries, needed to be vigilant to ensure that consumer information was used instrict accordance with its Terms of Service.During the decade after Fitbit’s creation in 2008, a health-oriented lifestyle became notsimply trendy but fashionable. Fitbi’s timing was impeccable, as it had alreadydeveloped early on an integrated system and innovative products. By 2017, with 60%of the market already cornered, its growth potential was still enormous. Analystssuggested adding value to its products and features by turning customers intosubscribers, and creating a solid base of long-term users by establishing strongrelationships with corporations which would in turn encourage their employees’ use ofFitbits. Many corporations and health insurers 19 had already determined thatcovering sports trackers in their policies garnered long-term health benefits, and Fitbitwas in a position to cash in on this trend, creating space for the company to grow inboth the business to consumer (B2C) and the consumer to consumer (C2C) marketsegments.Fitbit discovered, however, that while customers were willing to invest in their health,they were also very sensitive to price point. In response, the company developedvarious products ranging from basic or cheap wristbands to advanced smartwatcheswith many functionalities, each product targeting a specific customer segment.Nevertheless, Fitbit was aware that it needed to continue investing heavily in R&D toremain competitive.Fitbit customers had high expectations: they desired not only reliable devices, butvaluable insights from the processed data collected by the data driven company. Thedata gathered from users such as tracking, personal information, behavioral patterns,and the like were among its most valuable assets, making data protection and securitya high priority for the company. Successful, open data management and processingincreasingly became a front-line concern in the tech industry, providing an opportunityfor Fitbit to be in the forefront, ahead of its competitors, by becoming more transparentand sharing how collected data was used by the company. Like companies in manyother data collecting industries, Fitbit’s Privacy Policies and Terms of Service neededto spell out consumers’ rights and clarify how it would ensure that the gathered datawas protected, and not revealed or distributed to third parties. Even though thecompany was focused on protecting this sensitive data, there were a few cases whenusers’ accounts were hacked. 20 Furthermore, experts warned that smart devicescould soon be accessible by external software that could access stored data, whichcould put the company at risk. 21 And most people were unaware that Fitbit shared its6data with business partners. Growing public awareness of Fitbit’s data sharing policyand data protection shortcomings had the potential to spark a decline in customerloyalty.Financial PerformanceIn 2017, Fitbit Inc. had $1.6 billion in revenue and a net loss of $77 million (Exhibits 1,2 & 3).The company’s income statement showed sales decreased by 24% in 2017, netincome decreased by 169%, and its operating margin remained negative. On the otherhand Fitbit had no long-term debt as of 2017.MarketingFitbit’s marketing primarily targeted females aged 35–45, tech-savvy people,individuals with an above average income, inactive people who needed motivation toget into shape, and athletically inclined individuals who wanted to track their activitydata. To remain a market leader and grow Fitbit needed to increase sales to both menand women 18–45.To enhance its marketing efforts and create visibility, awareness, and accessibility,Fitbit pursued strategic partnerships with the NBA and Adidas; corporate salespartners such as Massachusetts General Hospital, that used Fitbits in clinical studies;corporate wellness agencies like ShapeUp and Limeade; and companies such as RedBull that encouraged use of Fitbit devices as part of corporate employee wellnessinitiatives. 22 The growing number of corporate partnerships demonstrated thecompany’s willingness to move beyond retail and the wide appeal of its integratedsystem to new segments of consumers. By the end of 2017, Fitbit was also selling itsproducts in 47,000 retail stores across 86 countries.In early 2018, Fitbit acquired Twine Health, a proven health-coaching platform thatempowered people to achieve better health outcomes at lower healthcare expense.23 This strategic acquisition promoted Fitbit’s integration into the healthcare industryand laid the foundation for further expansion through the inclusion of its productofferings by health plans, health systems, and self-insured employers, and creatingopportunities to increase subscription-based revenue.CybersecurityIn 2016, guidelines were created for manufacturers with recommendations for how totackle the cybersecurity of their devices. As of 2017, however, rather thancomprehensive legal protection for personal data, the United States only had piecesof a single legislative data-protection mandate to protect individuals’ privacy. 24 TheHealth Insurance Portability and Accountability Act (HIPAA), the US’s primary healthprivacy and security law, only applied to “covered entities” holding “protected healthinformation.” Federal regulators acknowledged that most Americans had no grasp ofwhen their health information was or was not protected by law—or what securitystandards applied in either case. As many had come to realize, widespread collectionof personal information put people’s privacy and security at risk.7Research and DevelopmentThe fast-paced competitiveness of consumer technology innovation demanded asteady stream of new products. Only through sustained, high-level investment inresearch and development to fund product design and innovation could companiessuch as Fitbit, Apple, and Samsung sustain consumer interest and support.In 2017, Fitbit reported that 58% of its employees were involved in research anddevelopment, a somewhat high percentage, yet necessary, given that ordinary usersonly wore a Fitbit for an average of 6 months before losing interest, so that Fitbitneeded to add functionality in order to survive. The company also placed itself in themiddle of the digital health revolution, 25 and needed to innovate in relation specificallyto that revolution to continue to succeed. Many new opportunities: new medicaldevices, health data collection, platforms for interoperability for other medical devices,were important innovative challenges for Fitbit. Fitbit recognized that the more medicaldevices and medical data the company captured, the more its market share wouldgrow.Many opportunities and distinctions drove research and design for Fitbit. In 2017, thecompany was selected as the first wearable device to be used by the NationalInstitutes of Health’s “All of US” precision medicine research program; by UnitedHealthcare and Dexcom as the wearable device provider for its Type 2 diabetes pilotprogram; by BlueCross BlueShield of South Carolina’s Medicare Advantage plan; andby United Healthcare’s Motion program. 26 Fitbit was also chosen to participate in theFDA’s new digital health software precertification pilot program. In 2017, the U.S. Foodand Drug Administration (FDA) selected nine companies, including Fitbit, from over100 companies based on company size and risk profile of the products, to participatein a pilot program called the New Digital Health Software Precertification Pilot Programto create an inclusive and efficient regulatory path for software as a medical device.27 The program initiated a radical change for certifying medical devices and productsby taking companies through a pre-clearing process. The FDA’s goal was to establishthe means to evaluate software development and to do so, the participating companiesneeded to provide access to the methods they used to develop, test, and maintaintheir products and data collection.Also, in Q1 2018, Fitbit reported that 18,000 developers joined its Fitbit developercommunity, creating a synergy between the company and that community, andinsights into the needs of the market and potential new acquisitions of intellectualproperty.Challenges Facing FitbitFrom 2008–2016, Fitbit was the leader in the wearable activity tracker market.However, in 2017, the market began significantly shifting toward smart watches thatnot only traced fitness but had other important functionality. The biggest challengefacing Fitbit was sustaining interest in its products given that the average consumerused a Fitbit for about 6 months then lost interest suggesting that Fitbit needed to addfunctionality in order to keep the consumer interested in its product.8In addition, as of early 2018, Fitbit did not have its own stores or distribution channels,and while the brand was well-known in the US, the company understood that globalexpansion would require significant investment in marketing. At the same time it wasbecoming harder for Fitbit to keep its competitive advantage in the face continualreports of the Apple Watch’s lead position in the smart watch market, with 17.7M unitsold. Xiaomi was second with 15.7M. Fitbit shipped 15.5M units in 2017, down from22.5M units in 2016. 28 However, Fitbit remained the wearables activity tracker marketleader, benefitting from its first mover advantage and integrated system that fitseamlessly into people’s lives. The company’s ability to develop partnerships thatcreated brand awareness, visibility, and accessibility also helped it reach new marketsegments.Contemplating its future, Fitbit faced three major challenges: intense competition fromsmartwatches; increasing its relevance and integration into the health care market;and keeping consumers interested in wearing the tracker for more than 6 months. Thecompany had its work cut out for it going forward.
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