Apple Watch, Fitbit, and Everyone Else

By my estimates, Fitbit and Apple Watch combined for nearly 50% of all wearable shipments in the June quarter of 2017. The market is a duopoly, and major questions about Fitbit remain. Fitbit’s ASP was just over $100 for the quarter while the Apple Watch was just over $300 in our model. However, Fitbit and Apple Watch are on two very different trajectories.

Apple Watch continues to slowly gain traction. In 2017, the Watch is already off to a great start and much better than the start it had in 2016. Since Apple Watch was announced I predicted it would be a slow growth path. We estimated around 20 million Apple Watches sold in its first year and the consensus number from a range of third party sources was around 15 million. So while we were not far off, some firms were predicting a range of 30-40 million in year one. I knew it would be a slow growth pattern because of the newness of the category and lack of familiarity with what a smartwatch was in general. Now, nearly three years later, consumers are starting to catch on.

I’m predicting Apple Watch to be on a growth trajectory in 2016 selling more than any year prior, and having an even better 2018. Apple’s marketing, and consumers spreading the word, as well as just starting to see them out in the world more often helps validate the product and generate interest. This simply took time and is playing out just as we suspected.

While Apple Watch is slowly becoming a thing, a major question for Fitbit is whether their smartwatch can follow suit. It is possible the growing success of Apple Watch will only help Fitbit’s efforts as Apple has helped mature the category. Fitbit’s CEO James Park seems confident.

Consumers will decide if Park is right. This is a very bold statement, however, and one that may not age well. At least he knows what is necessary for his company to survive. If Fitbit can keep customers from leaving their ecosystem and joining Apple’s, then Fitbit can still grow. In Fitbit’s latest earnings they stated 68% of consumers who purchased a Fitbit in the quarter were first-time buyers. This is a big number, and I have to imagine most of Fitbit’s sales the past few quarters have also been to first-time buyers. Fitbit has to help these customers go upstream and choose their smartwatch over Apple’s when and if they are ready.

While I believe Fitbit can make a decent looking smartwatch, that runs a capable OS, I’m not as convinced they can create the platform that is necessary to compete with the Apple Watch. When I say platform in this case, I mean more than apps. We know apps are still not a major factor on Apple Watch yet, however, Apple is growing the ecosystem around the Apple Watch by integrating with fitness machines at the gym, health and wellness programs, some insurance programs, etc. All of this helps in building momentum as consumers become more aware of all the things in their life Apple Watch can integrate with. Perhaps a more poignant observation here is how long it has taken, and even the slow head of steam, Apple itself has faced while trying to build an ecosystem/platform around Apple Watch. If it has been a challenge for Apple with Watch how can we expect Fitbit to fare any better any faster?

Last few points on Fitbit vs. Apple Watch. Perhaps the biggest challenge Fitbit faces in both hardware and as a platform is the large amount of overlap Fitbit has with iPhone owners. Data from our firm and others confirm a more than 50% overlap of iPhone owners who own or purchased a Fitbit. As Apple can out integrate Fitbit with current and new features around iOS, it makes it even that harder for Fitbit to stay attractive if their customer is now interested in moving from a basic fitness tracker to a more capable smart watch. It is with this overlap with the reverse point can be made that the Fitbit smart watch can benefit from Apple helping mature the category. With the bulk of Fitbit’s being sold were to new customers, you can argue Fitbit is helping Apple by getting customers familiar with the benefits of basic health and fitness tracking, and a good chunk of those customers may graduate to Apple Watch. This has been mine and a good chunk of Wall. Street’s thesis from the start that Fitbit will serve as a feeder to Apple Watch for many consumers.

What About Everyone Else?
In January of 2015, I wrote this post highlighting what I saw as the two most likely scenarios for the smart watch market. I encourage you to read the post, and download the report I wrote in 2015 for the full take but here is what I outlined as the first scenario, which is still the one playing out today.

Scenario #1
Apple will easily strongly influence the smart watch category in 2015 and 2016. It is hard to argue against Apple’s vertical advantage and tight control of their entire ecosystem. This advantage undoubtedly will give them dominance in the early stages of a category. If some things play out, we can see them command the category for the long term.

Apple had a near monopoly on the iPod/MP3 market. We can see a similar scenario playing out where Apple effectively “iPods” the smart watch category, maintaining dominant share over the next five to seven years. While the early success of the iPod was driven by Apple releasing iTunes for Windows, we don’t see the need for Apple to support other platforms to hold sway over the smart watch category. Apple’s existing iPhone customer base is large enough to keep it the foremost smart watch vendor and their smart watch platform as the reigning one in the smart watch category.

Apple is blessed by their developers and always has been. Developers for the Apple Watch will make or break the product. To dominate the category, Apple’s developers will tightly integrate the Apple Watch experiences with their apps and drive compelling use cases into the mass market. Apple’s developers are a large part of their competitive advantage for iOS, and this extends to the Apple Watch making it very difficult for other smart watch platforms to commit and attract developers or build an ecosystem. I believe, for the smart watch to go mainstream, it will take an ecosystem and Apple has history in their corner when it comes to building for a category.

This is still the scenario playing out and feeling most likely. My last point on developers is still the one lacking, but that can change quickly. By my estimates, Apple Watch owned 61% of smart watch market sales this last quarter. No single vendor or brand is even remotely challenging Apple in smart watch sales.

So what about scenario #2 around Android Wear? Most technology brands have given up on Android Wear, and the only group somewhat focused on it are fashion brands. Name brands like Fossil, Michael Kors, Boss, Movado, and more are dabbling with Android Wear smart watches. This move has done little to help Android Wear as a platform. However, it is a small victory for Google for now.

In reading some watch market industry reports, the early results from fashion brands sales of Android Wear devices is not promising. A number of brands who had been selling Android Wear smart watches were not pleased with the results nor were the retailers and are concluding it was not worth their time and investment. We will see if this new batch fares any different. The disadvantage many of these brands have is the channel since if it does not sell well retailers won’t carry the product. Apple with their own channel has been able to be patient and the constant presence in Apple stores is paying off for the Apple Watch.

One last point. China is and has always been a major contributor the Watch industry, and the Swiss watch industry in particular. I found this interesting point from an analyst note on Swatch.

Consumer spend running above wholesale orders, a positive signal for growth
Evidence from Chinese retailers, soft luxury, and our Global Blue tourist data indicates that Chinese retail demand has picked up since H2 16. With this nationality making up ~50% of Swatch’s sales we expect this recovery to benefit wholesale orders (70% of Swatch’s business) through 2017 and help allay bear concerns around wearables, high group inventory and Chinese demand for watches. Our conviction is reinforced by our view that the middle-class Chinese consumer will be the structural driver of the industry going forward. This benefits Swatch given its broad price offer. We believe organic growth is inflecting now: we see 2% in H1 17E, 7% in H2E, and 7% in 2018E.

There are positive signs all around in China with regards to the Watch market, and none of these reports have considered how those positive signs may help Apple. Apple Watch has had little success in China to date, as has the smartwatch category in general with only 9% of mainland Chinese consumers stating they own a smartwatch of any kind. It will be interesting to see if the same positive growth signs the Swiss watch industry is looking at in China pays off for Apple over the next year. It seems likely, but right now it is only a hunch.

Published by

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

One thought on “Apple Watch, Fitbit, and Everyone Else”

Leave a Reply

Your email address will not be published. Required fields are marked *