Unpacking the Week’s News: Friday, February 3, 2017

Fitbit’s Layoffs – by Carolina Milanesi

Fitbit announced this week it will be laying off 6% of its workforce, around 100 employees. The layoffs are part of an effort to reduce operating expenses by $200 million in 2017. It is unclear if any of the planned layoffs include staff from the recently acquired Pebble.

The announcement was made as the wearable vendor gave preliminary guidance for its fourth quarter earnings. The outlook was not good as revenue is expected to come in around $572 million to $580 million when expectations set in the previous quarter were for $725-$750 million.

Fitbit is facing the inevitable reality of a market opportunity capped by the lack of a differentiated offering. The wearable market is still struggling to get consumers to understand what these gadgets can do for them. While they were figuring this out, they have been quite happy to spend money on fitness bands which are pretty clear in their value proposition. This is how Fitbit came to be the market leader. The most recent data from Kantar released this week, showed Fitbit representing 75% of the overall fitness band sales in 4Q16 – up from 43% in 3Q16. The problem is, the number of consumers buying was small in the first place. Kantar puts US penetration of smartwatches and fitness bands at only 15.6%, a marginal improvement over the 14.8% recorded a year ago.

On top of not being able to expand its base as much as they would like to, Fitbit is suffering from two underlying issues. The first has to do with the fact most of its current base is not looking for more than what Fitbit delivered in the device they initially purchased. The second has to do with Fitbit’s features and sensors not being accurate and sophisticated enough for consumers who are seriously into sport and fitness. Consumers who put value over features now have options in the market as more Chinese vendors are delivering devices with very aggressive price points even in the US. As an example, the Xiaomi Mi Band 2 is currently available on Amazon for less than $40. At the high end, Apple is becoming the de facto choice for most consumers who are happy with a smartwatch design while Samsung is the choice for band lovers.

While the acquisition of Pebble might deliver technology and expertise that will help improve both feature set and performance, I remain skeptical as to how much Fitbit will be able to push its users to want more.

Tech Industry Grapples with Trump Executive Orders on Immigration – by Jan Dawson

The tech industry seemed on a collision course with the Trump administration throughout the campaign – pointed remarks aimed at Apple and Amazon in particular made it likely there would be tensions between some of the US’ largest tech companies and the president. However, the administration began with meetings between the president and leaders of some of the largest companies and several companies had gone out of their way to suggest they would be increasing investment or employment in the US going forward.

Things had therefore been fairly quiet on this front until the executive orders signed last week relating to immigration, which began to change the relationship markedly. Although Friday – the day the orders were signed – was fairly quiet, most of the major tech companies came out with some form of opposition to the order on Saturday or Sunday. That opposition has ranged from practical objections to the impact on employees and business to moral condemnation of the nature of the orders themselves, with an apparent correlation between the size of the company and the sharpness of the objections (smaller companies tending to be more critical, while larger ones less so).

Since the weekend, attention seems to have shifted from statements of condemnation and objection to concrete steps in opposition to the orders – several lawsuits are underway in Washington state of which some tech companies are backers and several other big tech companies are said to be working on a combined letter to the administration, both asking for changes and offering help in drafting policies that would be more likely to achieve the desired objectives without harming employees or business at the companies.

It’s become increasingly clear the division between the administration and many employees of major tech companies is going to lead to some tensions, as companies fail to speak out for fear of angering large numbers of their customers who may be in favor of the moves, while other companies suffer as a result of failing to take a stand. On Thursday, Uber CEO Travis Kalanick stepped down from his role on one of President Trump’s advisory councils, for which he and Uber had been heavily criticized. Kalanick’s apparent willingness to work closely with the administration had already led to anger at Uber, but its relatively weak response to last week’s actions (and an unfortunate set of moves in New York City over the weekend during a strike by taxi workers) reinforced the perception that Uber was in cahoots with the administration.

I suspect we’re going to see more backlash on both sides, as some companies act strongly to condemn and oppose administration policy and lose customers over such moves (as Starbucks already has outside the tech industry for its plans to hire refugees) and others fail to act strongly enough to please. Tech companies are probably wise to focus on the practical implications for their businesses, much as this softer opposition may upset some employees. There’s an open question as to whether companies have a primary duty to reflect the views of their employees, their customers, or their shareholders when it comes to controversial issues – in this case, more of the US general population is in favor of the immigration orders even as Silicon Valley is strongly opposed to them. Companies will have to walk a fine line.

More broadly, the relationship between this administration and the tech industry is already more contentious and strained than at any time in the previous two administrations (or any other administration in recent memory). Both the administration and tech companies are going to have to find ways to express their views while also acting in concert where their interests are aligned, as in reducing regulation, repatriating overseas profits, and lowering taxes. The industry needs to be wary of losing its influence with the administration by acting overly aggressively, while leveraging that influence where it can.

Spotify Looking to Delay IPO to 2018 – by Ben Bajarin
Reports came out yesterday that Spotify was looking to delay their IPO until 2018:

The delay would give Spotify more time to build up a better balance sheet and work on shifting its business model to improve its margins, one source said.

Part of this would include a change to Spotify’s licensing relationship with labels, using the company’s strong growth and position in the current streaming market as part of its leverage, to move from a varied pricing model based on the number of times a track is played to a fixed one.

Alongside this, Spotify may also be looking to renegotiate some of its financing that had been pegged to the timing of the IPO.

In all honestly, I’m not sure I see Spotify going public. I think an exit is a more likely scenario. We have this debate in the industry on whether things which make sense as bundled or integrated features to your personal computers can succeed as stand-alone software/services. While no one doubts Music is an important part of their mobile experience, both Apple and Google can more deeply integrate their music services (Apple with Apple Music and Google with YouTube Red) into their respective smartphone operating systems and make it more difficult for third parties. We are already seeing Apple’s steady rise with Apple Music thanks to their integration strategy and I expect we will see Google get more aggressive as well as they look to drive revenues beyond search.

Music is tough, by itself, to monetize as a streaming service. Spotify wants to work on better licensing deals and the report says they want to use their customer base as leverage. Having worked in the entertainment industry for a stint and still have many friends who are musicians, agents, and lawyers, I can tell you the entertainment industry knows they have all the leverage. None of these content services would be anything without them and they hold all the IP.

I don’t see this working well for Spotify as a stand-alone business and I think 2017 will be tough for them. Hopefully, they see some of the underlying struggles and look to make a move with a suitor so their investors and employees can have an exit of some kind.

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Carolina Milanesi

Carolina is a Principal Analyst at Creative Strategies, Inc, a market intelligence and strategy consulting firm based in Silicon Valley and recognized as one of the premier sources of quantitative and qualitative research and insights in tech. At Creative Strategies, Carolina focuses on consumer tech across the board. From hardware to services, she analyzes today to help predict and shape tomorrow. In her prior role as Chief of Research at Kantar Worldpanel ComTech, she drove thought leadership research by marrying her deep understanding of global market dynamics with the wealth of data coming from ComTech’s longitudinal studies on smartphones and tablets. Prior to her ComTech role, Carolina spent 14 years at Gartner, most recently as their Consumer Devices Research VP and Agenda Manager. In this role, she led the forecast and market share teams on smartphones, tablets, and PCs. She spent most of her time advising clients from VC firms, to technology providers, to traditional enterprise clients. Carolina is often quoted as an industry expert and commentator in publications such as The Financial Times, Bloomberg, The New York Times and The Wall Street Journal. She regularly appears on BBC, Bloomberg TV, Fox, NBC News and other networks. Her Twitter account was recently listed in the “101 accounts to follow to make Twitter more interesting” by Wired Italy.

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