Fitbit made its S1 filing coming off a quarter of astounding growth: $336.8M in revenue - up from $108.8M in Q1 2014. The enterprise generated $48M in net income. Last week we learned it hopes to raise $100M through an IPO. Why would Fitbit IPO now?
There are any number of traditional reasons - raise capital, return money to investors, etc. - but what is interesting to debate, however, is the timing of Fitbit's IPO. Fitbit may have chosen to IPO now so it can:
- Draft off Apple's wave. Fitness bands and smart watches have been on the market for years, but sales have been limited - especially for smart watches. Apple's entry and marketing spend will drive awareness of the category from early adopters on the west coast to mainstream consumers. The tide will lift all boats, as the saying goes.
- Raise capital at a possible peak. The smart watch may kill off or stymy the growth of lower end fitness bands. The cameras on early mobile phones were not as good as the digital point and shoot cameras or SLR's owned by consumers, but a camera on hand is better than the one at home in a drawer or closet. The pedometer and sensors on a smart watch may not measure activity with the same precision as a dedicated device, but it may be good enough for many consumers.
- Take advantage of a market with few IPO candidates. Few small companies will mature enough - let alone show the financial strength - to take their companies public. Many entrepreneurs are building services that make great features rather than great businesses. Their exit strategy is to sell to a Google, Facebook, Salesforce.com, IBM, Oracle, Microsoft, or SAP.
How does Fitbit's performance stack up to date?
Fitbit's performance is often compared to that of other manufacturers of fitness wearables. There is no doubt it dominates in the hardware category, but there is more to the story.
- Sales volume is impressive, but in a small category. Fitbit has sold 20.8 million devices to date since founded in 2007, with published sales volume dating back to 2011. In comparison, Apple sold an estimated 1 to 1.5M Apple Watches in the first few days it took orders. Forrester anticipates Apple will sell 10M devices this year.
- Registered user numbers meet expectations; means little. With 19 million registered users at the end of March 2015, Fitbit's audience is comparable to its sales volume. In comparison, MyFitnessPal had closer to 80 million registered users when Under Armor bought it for475 million. Audience size is important if a company plans to monetize the app through advertising or use of customer data and associated insights generated.
- The number of paid active users is impressive, but the source is unclear. With the acquisition of FitStar, Fitbit's paid subscriber base grew from 6.7 million at the end of December 2014 to 9.5 million at the end of March 2015. Paid subscribers are hard to obtain. Anecdotally, many apps begin with a freemium model with the hopes of selling subscriptions, but few apps convert more than 10% from free to paid users.
What threats does Fitbit face?
Fitbit faces a tough road ahead from both a handful of manufacturing heavyweights and hundreds of entrepreneurs. Fitbit's revenue stream will be threatened if:
- Data becomes a commodity faster than Fitbit scales its apps. Mobile phones and smart watches have many of the same sensors as wearable devices and often more. Consumers could use their mobile phones or smart watches to collect much of the same information that Fitbit collects. Apps then access this data with consumer permission from the platforms hosted by Apple, Google, and Microsoft. Fitbit has chosen not to give Apple HealthKit access to its data, but other devices will. Data alone will not be enough to offer a source of competitive advantage.
- Doing too much for too many. Fitbit's success to date has been built by offering a portfolio of products to meet the needs of a broad set of consumers. The company seems to have won so to speak in the category of casual- or newly active consumer. If it weren't dominating mainstream consumers, cumulative sales would not have topped 20 million devices. In the meantime, Garmin, Polar, TomTom, etc. continue to do well in higher end devices targeted towards more elite athletes with higher expectations of precision data for their particular sport. Apple, LG, Pebble and Samsung will probably create and sell more feature rich smart watches. The open question is, will there still be enough interest in the middle?
What will it take to succeed long term?
Fitbit like any other product or app in its category must continue to prove that it offers utility at the right price point. Fitbit success will hinge on:
- Convincing enterprises/payors to buy devices for employees/members. Despite healthcare reform and the push to have consumers be more accountable for their healthcare costs, too few consumers are motivated to improve their health or wellness for device sales to continue at such a high pace. Large scale adoption will hinge on enterprises or payors building or incenting members to purchase pedometers to take a more active role in improve their health and reducing the cost of care. What it is worth for consumers (e.g.,50 reduction in healthcare premium each month) is still an unknown. It is also unclear if financial benefits alone will motivate consumers.
- Being better than free options. Fitbit offers a free app with its products plus a paid coaching service as part of a premium offering. So do many apps. App stores have thousands of health and wellness apps. Most of them are free. In fact, start-up's in Silicon Valley are even encouraged by investors to "build audience now and think about the business model later." It has worked for so many - Instagram, MyFitnessPal, SnapChat, WhatsApp. Consumers hold the power to share data with their choice of third party app developers through platforms like Apple's Healthkit. The developers don't need to own the hardware to own consumers.
- Owning the consumer. Consumers don't care about data. Consumers depend on a range of engagement mechanisms from community to coaching, support, competition and gamification to help them change their behavior. The app - as much or more than the device on the wrist - helps consumers make good choices throughout the course of the day. Fitbit uses many of these tactics within its app, but there is no data shared that proves it is a clear leader in the market.
All of the data for this report is from the Fitbit S1 filing. For more information, please see the registration statement filed with the Securities and Exchange Commission here.