Apple CEO Tim Cook made an interesting comment during last week’s quarterly results announcement in relation to the firm’s wearables business. He boasted that this division of Apple is now bigger than 60% of Fortune 500 companies.
Certainly in the search to find a revenue stream to replace the slowing-down iPhone growth, the wearables division is delivering the goods. The business, which includes AirPods and Beats headphones as well as Apple Watch, grow 48% year-on-year to $5.53 billion for the latest quarter.
For Cook, it’s vindication of a playing a long game:
We stuck with that when others perhaps didn’t and really put a lot of energy into this and a lot of R&D and are in a very good position today to keep playing out what’s next there.
That of course, as we’ve discussed before, includes a major focus on digital health and well-being, something that Cook said continues to evolve:
WatchOS 6 is a major step forward in helping Apple Watch users stay healthy, active and connected…we continue to innovate on Apple Watch’s promise to be an intelligent guardian for your health. watchOS 6 includes powerful new features like notifications that warn about high decibel noise to protect your hearing and cycle tracking to aid in women’s health care decisions.
In stark contrast, Fitbit, one of the pioneers in this space, turned in some pretty dismal numbers in the same week, with quarterly sales up only 4.8% to hit $313.6 million. In a market which is expanding and which it helped to define, Fitbit’s looking none-too-healthy, having lost 82% of its value since its 2015 IPO. It’s now worth less than $1 billion, a fifth of Apple’s wearables quarterly revenue.
CEO James Park cites lower-than-expected sales of its supposedly game-changing lower-priced Versa Lite smartwatch as a reason for the company’s poor numbers. This was launched earlier this year with a thinly-disguised Apple criticism underpinning it. As Park continues to articulate it:
We think there’s a large segment of the world’s population that cannot afford a $400 for smartwatch, but once the opportunity become more informed and take control of their overall health and wellbeing with more accessible solutions from a trusted brand such as Fitbit.
That’s fine in theory, but another throwaway comment from Cook suggests that it’s flawed in reality when he reveals that 75% of Apple Watch buyers in the most recent quarter were buying their first device. The appetite – and the wallet – to support sales of $400 smart watches does seem to be there.
Despite this, Park remains adamant that the Fitbit lower-cost model is one that can win out:
We are confident, there is a real opportunity to deliver a device innovation at more affordable and accessible price point and we continue to focus on bringing devices to market in the $50 to $300 price range that are easy to use.
But he is also conscious that the firm needs to lessen its dependency on devices themselves and to grow a digital services business around the healthcare sector. That’s going to mean making a transition towards becoming a business where customer acquisition begins with a sale of the device, but is able to upsell from there. Park argues:
Trackers have always been key to our portfolio and we continue to see a clear segment of users prefer this form factor. This is further validated by the interest we’ve seen from payers, life insurance companies, governments and businesses embracing wearables, specifically trackers as a key strategy for behavior change for their members and employees.
With tracker devices sold up 36% in the first half of 2019, we believe the strength in tracker growth is evidence that this category of the wearable market and expand with innovation. We believe smart watches will continue to drive wearable growth and we are excited by the innovation we can bring to the category and expect to continue our product mix for this segment of the wearables market. Beyond customer acquisition, the next step is providing additional value to the community with premium service.
And that’s what’s now being teed up for full scale launch later this year, following what Park describes as positive initial pilot trials in two countries:
Our premium service delivers a dynamic and personalized experience that will provide everyday consumers with data tools, program, guidance and support, they need to reach their health goals, whether its activity, nutrition, sleep, or mindfulness, our premium service helps users understand the correlation between their behavior and their health and provides them with tools to improve it, all in one centralized place.
There is some reason for optimism about this strategic shift, he suggests, pointing to Fitbit Health Solutions, which he suggests can deliver $100 million in revenue this year. That said, there’s a placebo in play here as that revenue remains heavily hardware and device centered, as Park admits:
Today revenue does remain skew towards hardware, but we are looking for ways to accelerate the mix of that revenue towards software and services…We’re already beginning to rollout of bundled offerings or devices are coupled with Fitbit care and a Health Coach.
There is also an enterprise customer opportunity in play, he adds:
The other area of opportunity there is as we launch our consumer premium offering, there is an opportunity to sell that into our enterprise customers as well as a lower price tier for digital interventions.
One of the factors in our growth and the increased performance of FHS is our Fitbit Care business and the pipeline, and Fitbit Care again is our health coaching offering that allows health plans and employers and their employees and members to manage chronic disease conditions like diabetes.
So that pipeline is continuing to grow and we’ve already started the rollout of bundled offerings where our devices are actually coupled with Fitbit Care and its associated digital interventions along with a coach. And we’ve seen promising initial stats with that offering.
That’s been a bright spot in the healthcare business along with a strong growth internationally as well. In terms of the FDA, we’re continuing to work with the FDA on a variety of initiatives, including around sleep apnea.
As I’ve noted before, I use my Apple Watch primarily as wrist jewellery and to tell the time, but I know several people who build their health and fitness schedules around it. It’s a success for Apple and a savvy tapping into the zeitgeist that means schilling out $400 is not seen as a barrier, whatever Fitbit’s reasoning might be. It’s clear that Fitbit is not a well company. Whether the prognosis is terminal remains to be seen, but loosening the dependency on selling hardware and building a digital services business is going to be critical. It’s also going to be very difficult to pull off, particularly the enterprise health sell. We’ll take the pulse on this later in the year once the roll-out of Fitbit’s offering here gets underway.