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Fitbit could win in 2017, if it makes some changes

Daniel Howley
Technology Editor

The year is nearly over and for San Francisco-based Fitbit it couldn’t come sooner. The company, which is virtually synonymous with fitness trackers, closed out 2016 on a down note with its stock price plummeting 30% after its third-quarter earnings report in November.

Fitbit has yet to recover, even though the fitness tracker market as a whole saw a 31% increase in units shipped in 2016, according to IDC Research. A number of factors worked against Fitbit over the last year: supply chain issues, difficulties in the Asia-Pacific market and the increased saturation of the fitness-tracker market.

But Fitbit is far from finished. And with a few changes it might be able to put its recent performance in the rearview mirror.

The hardware

The most damaging news for Fitbit in 2016 came when the company revealed supply chain problems with its latest fitness tracker, the Flex 2. CEO James Park said the company wasn’t able to produce as many Flex 2 devices as it had expected due to manufacturing issues — limiting supplies for the holiday shopping season, when Fitbit usually sees a major uptick in sales.

On top of that, the company began selling pre-orders for the Charge 2 and Flex 2 in August, which likely pulled Q4 sales into Q3. The only way Fitbit can address these issues is to make sure it doesn’t repeat them. It needs to ensure its manufacturing capabilities are up-to-snuff when it’s time to roll out new products and that the company adheres to its release schedules.

Outside of its manufacturing issues, Fitbit struggled mightily in the Asia-Pacific market where sales fell 45%, due to stiff competition from regional brands that sell their devices at lower prices. Gartner Research analyst Angela McIntyre suggests the best way for Fitbit to overcome its problems in Asia is to build its brand recognition in that market. In the US, Fitbit is as closely associated with fitness trackers as Kleenex is with facial tissues. If the company can build that kind of following in the Asia-Pacific region, Fitbit may be able to fight off local competitors.

Focus on software

Fitbit is a hardware company, which means it lives and dies by its device sales. But as the fitness tracker market becomes increasingly saturated, the gap between competing devices is quickly narrowing.

There are only a handful of ways you can redesign a wrist-worn fitness tracker, and only so many health stats you can track from a person’s wrist. And at this point, as IDC analyst Ramon Llamas points out, fitness trackers have largely become indistinguishable in terms of their hardware capabilities.

Fitbit’s Flex 2 can be paired with this bangle accessory.

“If you take a look at fitness trackers as a whole, they are getting to the point where they are tracking the same stuff: number of steps, calories burned, distance traveled, sometimes your heart rate,” Llamas said. “Unless you’re bringing a new functionality to the table or doing something radically new, you can get forgotten or interest can wane fairly quickly.”

Fitbit has certainly worked to improve its core fitness apps through the years, but Llamas says the company needs to focus more on bringing third-party apps to its devices.  

“You can have all of your metrics that you want to measure, but what if we could increase the usefulness of that device by letting you run third-party applications for it,” he said. “Because the value of your device increases with the more apps you can download to it.”

That could be just what Fitbit had in mind with its acquisition of smartwatch maker Pebble’s software assets in December for $40 million. According to Bloomberg, sources familiar with Fitbit’s decision said the company was largely interested in Pebble’s apps, cloud services and operating system.

While the acquisition didn’t do much to impact Fitbit’s stock price, investors could simply be taking a wait-and-see approach to watch what the company can do with Pebble’s technology.

“Rather than give Fitbit the benefit of the doubt, they are reserving judgment until new products are announced related to Pebble,” Llamas said.

Fitbit’s Charge 2 is a powerful, attractive fitness tracker.

Pebble isn’t the only company Fitbit acquired in 2016. In May, the company snatched up mobile payment technology firm Coin. And while Fitbit said it doesn’t have any current plans to include Coin’s tech in its current products, the company did say it could bring mobile payments to its future devices. Doing so would enable users to make purchases even when out for a jog without needing their wallets or phones.

Further expand into the healthcare market

Consumer fitness trackers aren’t medical-grade devices, but Fitbit sees a major opportunity in further expanding its role in healthcare and insurance markets.

The fitness tracker maker is working with about 1,000 organizations and 70 Fortune 500 companies to help control healthcare costs using a combination of Fitbit’s trackers and specialized corporate wellness programs. Apparently, it’s working.

A study by Springbuk Analytics found that employees who opted into a two-year Fitbit corporate wellness program saved an average of $1,300 in annual healthcare costs. A second study showed the Ohio’s Dayton Regional Transit Authority saved $2.3 million on healthcare over two years by using data from Fitbit’s trackers in addition to health coaching, goal setting and a participation incentive.

Fitbit’s CEO isn’t exactly tight-lipped about his desire to see the company take a larger role in the healthcare industry. He’s indicated in various interviews that his organization is moving toward becoming a digital healthcare business.

The company’s corporate customer base is continuing to expand, too. Fitbit recently announced that Keck Medicine, the University of Southern California, New York Life, Pitney Bowes, SAP, Sharp Healthcare and Teach for America are working with Fitbit to create custom corporate wellness programs for their employees.

So far, Fitbit’s corporate wellness efforts make up less than 10% of the company’s total revenue. If Fitbit can entice more organizations to get on board and somehow make more cash from its services, the company has the potential to create a secondary revenue stream that’s more insulated from the whims of the consumer market.

Fitbit just has to keep investors happy long enough for the company to bring its plans to fruition.

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Email Daniel at dhowley@yahoo-inc.com; follow him on Twitter at @DanielHowley.