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How Fitbit's outsmarting Apple, at least so far

Aaron Pressman

Fitbit (FIT) became synonymous with fitness tracking by keeping it simple, but CEO James Park sees further growth for the maker of the world's most popular wearable gadgets by branching out.

The company's coffers are flush after its successful $732 million initial public offering in June and Park tells Yahoo Finance that he sees opportunity in creating more options for consumers, as well as its own line of accessories to supplement those from fashion line Tory Burch.

"The great thing about the IPO is we have lots of money to do exciting things," Park says in an interview. Branching out also means more marketing than Fitbit did in the past, with television commercials and even cereal boxes now within reach.

Park, the Harvard dropout who co-founded the company in 2007, is in good spirits after a record-breaking second quarter. Revenue increased 253% to $400 million on sales of 4.5 million Fitbits -- as many as the company sold in the entire year of 2013. Most were the latest, and most expensive, models including the $150 Charge HR and the $250 Surge.

That came as a huge surprise to Wall Street, where analysts expected only $319 million of sales and many thought Apple's (AAPL) new watch, released in April, would eviscerate the Fitbit. But while Apple didn't disclose exactly how many watches it sold, estimates indicate it lagged far behind Park's company, selling perhaps half as many of its new wearables as Fitbits sold. Now analysts are cutting forecasts for how many watches Apple will sell this year while increasing their outlook for Fitbit.

Advantage of the ecosystem

Obviously, consumers have a clearer grasp of their Fitbit's practical uses compared with the somewhat amorphous aims of the more multifunctional Apple watch. And even the most expensive Fitbit costs less than the watch, which starts at $350 and quickly zooms past $600.

But several less obvious strengths also helped Fitbit come out ahead of Apple and more direct competitors like the Nike's Fuelband, Jawbone and Garmin -- strengths that should continue to propel the simpler device to greater sales. Fitbit had a leading 68% share of the fitness tracker market to start the year, according to NPD.

First, Fitbit offers a wide array of devices with different functions, prices and designs. The strategy is much like Apple's iPod line in its heyday. An entry-level Fitbit Zip costs $60, fits in a pocket and does little more than count steps. It appeals to customers perhaps just getting interested in improving their fitness level. Meanwhile, the top end $250 Surge, which includes GPS, a heart-rate monitor and even some smartwatch-like functions, is aimed at the hardcore athlete training for a marathon.

And the devices are sold not just in Fitbit's online store but at 45,000 retail locations around the world, including Best Buy (BBY) and Target (TGT), making them nearly impossible for shoppers to avoid. Apple hogged all its new watches for itself, perhaps hampered by supply shortages, and only recently agreed to expand to Best Buy stores.

 "We really wanted to build health and fitness products that are for everybody, not just serious athletes" says Park. "And we want to give people a lot of different ways to enter the Fitbit ecosystem."

That ecosystem provides another edge supporting Fitbit's growth. The company's devices interact with dozens of different apps, services and web sites that cater to the same fitness and health audience. The ties helped Fitbit attract 11 million active users, who in turn, help bring new customers to the platform.

In yet another ecosystem play, Fitbit is expanding its work with fashion designer Tory Burch. Park calls the alliance "incredibly successful" after the initial set of accessories, like metal bracelets that gussy up the plain, plastic Fitbits, sold out online in three hours. Park met with designers at Tory Burch a few weeks ago to review the next spate of fashionable offerings and promises "great new stuff" arriving soon.

Fitbit Surge, which sells for $249.95 (Photo: Fitbit.com)

Fitbit isn't saying much about the new accessories of its own that will forthcoming. So far, Fitbit's own line of additional gear is limited mainly to a few cases and chargers plus a wifi-connected scale, the Aria, that debuted in 2012.

In a final area of strength, Park has been seeking out ties with the burgeoning movement among health and life insurance companies to encourage their customers to lead healthier lives. John Hancock's Vitality life insurance program offers customers discounts and rewards based on meeting fitness goals. They can choose from a variety of devices to document their efforts, but John Hancock starts them off with a free Fitbit tracker.

Avoiding feature bloat

Just how will Park and his team go about adding features? Very carefully, he stresses, offering as a case study the decision to add the capability of caller ID notifications from a user's smartphone to the newest models.

Fitbit designers thought intuitively that it might be a useful function to add, because customers wore the trackers on their wrists all day. But an initial survey with consumers indicated that they did not want to be interrupted during a workout with incoming call info. Still, the designers weren't deterred. They tweaked the call notification scheme to shut off during workouts.

"It's more of an art than a science," Park says. "We want to be very thoughtful in the things we add," he says, adding that excessive features may be hurting smartwatch sales from his competitors. "People still don't quite know why they want to buy these devices that do 20 or 30 things."

Keeping the focus on health and fitness and avoiding feature bloat has been critical, says Ramon Llamas, research manager covering wearables for International Data Corp. "Look at how Fitbit has branded itself and allied with events and kept the messaging simple and straightforward to end users," Llamas says. "The devices are not an end, but a means to an end and part of your life -- smart move."

Some see fitness tracking as a fad that will soon fade. They point to surveys showing 40% of fitness tracker buyers abandon their device within six months. But even if the figure is accurate, that would still leave a large majority of buyers enmeshed in Fitbit's ecosystem, drawing new customers and partners in a market that's growing overall at a tremendous pace. And the company has barely tapped markets outside of the United States -- less than 22% of second-quarter sales were outside of the country. IDC predicts sales of 72 million wearable devices worldwide this year, up 173% from last year, and growing to 156 million in 2019.

Fitbit's stock has done well since going public at $20 a share. It closed at $29.68 after the first day of trading June 18 and hit an all-time high of $51.64 on Aug. 5, just before second-quarter results came out. Despite exceeding estimates for both profit and sales, the shares sold off. Some investors may have been disappointed with a dip in the gross profit margin, others may have simply been cashing out after the run-up. The stock closed on Wednesday at $43.10, still more than double the IPO price.

Some analysts foresee more pressure on Fitbit's prices -- and profit margins -- as competition continues to intensify, not just from Apple but also from companies already in the athletics market, like Adidas and Under Armour (UA). Under Armour partnered with HTC on one device, the Grip, though it hasn't exactly caught fire. And almost all analysts expect Apple will refine and improve the Apple watch in coming versions, leading to higher sales.

"This is a market that's just continuing to fragment and there will be tremendous pressure on prices, especially in the fourth quarter holiday season," says Weston Henderek, an analyst at NPD. But Fitbit is stronger than most, as it has by far the best brand recognition, he says. "They're well positioned to deal with this."