Fitbit's big race: Grow software, services

Fitbit wants to be more than a wearable company. Now it has launched an IPO it'll need to step up those premium services plans to even begin to justify its valuation.

Fitbit has launched its initial public offering Thursday, showed the world it's a real business and commanded a $6 billion valuation in a few minutes. But Fitbit's future growth---which will be necessary to even attempt to justify its valuation---depends on a yet-to-be-determined software and services strategy.

Today, Fitbit has a thriving wearable business with shares up about 50 percent from an initial price of $20. For the most part, Fitbit is a hardware company. The promise, as noted by CEO James Park, is that Fitbit can be more than a wearable company. Fitbit is investing in research and development and software. Luckily, the company has the cash to do so.

But here's the rub: Fitbit doesn't have a lot of time. The wearable market will go commodity in a hurry. Fitbit in this regard is similar to GoPro. Hardware launched the company, but the ecosystem, services, content and software will sustain the brand. Does Fitbit have the chops to be a cloud and data services juggernaut?

According to Fitbit's prospectus the plan is to:

  • Make significant investments in R&D.
  • Drive engagement with software and services. Fitbit is aiming for "video-based exercise experiences on mobile devices and computers." The catch is that Fitbit doesn't track users that have gone inactive.
  • Grow the corporate wellness market.

In other words, Fitbit today tracks your activity. Tomorrow it wants to coach you and be your trainer.

What's interesting here is that Under Armour, Jawbone, Nike and a bevy of others have various spins on the same approach. Toss Apple and Google into the wellness mix and Fitbit doesn't have a ton of time to begin its software and services domination---especially when Jawbone clearly has a better app and companies like Garmin are better equipped to reach real athletes.

Also see: Under Armour's digital product plan to be fleshed out | CNET Fitbit reviews

Perhaps the biggest question is whether Fitbit can derive significant revenue from subscriptions. Fitbit's subscription revenue is less than 1 percent of the total pie.

To date, substantially all of our revenue has been derived from sales of our connected health and fitness devices, and we expect to continue to derive the substantial majority of our revenue from sales of these devices for the foreseeable future. In each of 2012, 2013, 2014, and the three months ended March 31, 2014 and 2015, we derived less than 1% of our revenue from sales of our subscription-based premium services. However, in the future we expect to increase sales of subscriptions to these services. Our inability to successfully sell and market our premium services could deprive us of a potentially significant source of revenue in the future. In addition, sales of our premium services may lead to additional sales of our connected health and fitness devices and user engagement with our platform. As a result, our future growth and financial performance may depend, in part, on our ability to sell more subscriptions to our premium services.

fitbit-financials.png

Indeed, it's unclear how many Fitbit users will pay up for premium services. Watch Under Armour's MyFitnessPal, which just launched premium services, closely. What will Fitbit offer that you'd actually pay for in a subscription?

Perhaps the easier win for Fitbit is the corporate wellness track. After all, enterprises need to lower their health costs. Then again enterprises are already hooked into the iOS ecosystem. Wouldn't HealthKit be a better route for corporate wellness---assuming many of your employees eventually bring an Apple Watch to work?

In any case, you get the gist of Fitbit. You're not paying up today for the hardware business. Ultimately, you're paying up for a hardware company that can become a software and services outfit. Historically, that transition is tricky even if there's a good chunk of dough in the bank.

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