At a small event in Manhattan this week, Fitbit laid out its future for the press. Tellingly, the event was far more focused on the company’s software play, with the big hardware announcement feeling almost rushed at the end.
Along with an increased focus on healthcare providers and enterprise, much of its revenue strategy will be tied up in Fitbit Premium, a $10 a month subscription service. The offering marks a major shift for a company whose identity has been so closely tied to hardware for its first decade of existence.
The announcement comes a year and a half after the release of Versa. The smartwatch has helped the company begin to right the ship after several quarters’ worth of financial struggle. And while last quarter found Fitbit’s valuation stumbling a bit on the heels of a disappointing performance by the Versa Lite, the company says it continues to be committed to its core hardware offering.
Following the announcement of Fitbit Premium and the Versa 2 smartwatch, we sat down with CEO and co-founder James Park to discuss the company’s path and what the future holds for Fitbit.
The state of Fitbit
Brian Heater: The flow of today’s briefing was different. In previous years, the company’s always led with hardware.
James Park: You noticed that it was pretty conscious, and I think it’s just to reinforce the fact that what we’re working on is not just about hardware anymore. But it’s equally important that the services component is an important part of our strategy, and also an important part of an overall solution, again, people healthier.
I mean, what we found is that just giving devices to people gets them only part of the way. But then they need the software layer and the experience layer on top to really help them hit whatever goals that they’re trying to achieve. So we’ve internally doubled down much more on the software investment.
Heater: What do you mean by doubled down? In terms of headcount, investment?
Park: Investment, emphasis within the company, how we communicate our strategy. So pretty much everything, and trying to transform our own internal company narrative, and how other people outside the company see it as we’re not just a consumer products company or a hardware company. We’re more of a health solutions company that integrates both software and devices to help people meet their goals.
Heater: Are you able to kind of quantify that? In terms of how you’re allocating resources for hardware versus software?
Park: We can’t go into the specifics, but we’ve definitely shifted a lot more of our attention and internal investment towards software and services. It’s not to say that hardware isn’t important. It will be. I mean, they’re two pieces of the solution. But it’s much more of a balance today than it was in the past.
Heater: You wouldn’t say that internally there’s more emphasis on software and content versus hardware?
Park: It’s more of a balance today. And that’s kind of reflected in what you saw. We really wanted to drive that point home.
Heater: And do you see it being a kind of 50/50 going forward? Or is software going to take more and more precedence as you go forward?
Park: I think it’s going to be much more of a balanced approach. I think primarily in the past it was pretty much all hardware. And we talked a little less about the software that we’re working on. But again, much more of a balance going forward.
Smartwatches and pricing strategies
Heater: The narrative around Apple’s last several quarters, as far as how they’re allocating, is a shift into content. Do you think that more and more of the revenue is going to be generated by content and services versus hardware?
Park: Yeah, I think more of our profits, because of the gross margin profile, will be generated by the software and services. But I think the good thing for our category in general is that unlike smartphones, the hardware portion is still rapidly growing in many countries around the world.
If you look at smartwatches, they’re growing 30% or higher per year. And for us, in the first half, trackers actually grew 51% year over year. So there’s still a lot of innovation and growth in the hardware portion of wearables. But where we do see things rapidly taking off is in software and services.
Heater: What do you think the life cycle of one of your sort of watches is going to be for most users?
Park: You know, it’s going to depend. But what we realized is that there’s still a fast innovation cycle. That’s why we announced in our last earnings call that we’re shifting everything to an annual cadence of releases for both our smartwatches and trackers. And we think that’s a good pace for a variety of reasons.
Heater: You’ve been pretty candid about the fact that the Versa Lite wasn’t the hit you were expecting.
Park: With the Versa Lite, I think one of the things that we talked about was that we definitely missed on the pricing and promotion strategy.
Heater: Pricing was too high?
Park: Yeah. I mean, consumers ended up falling in two camps. Either they’re willing to pay more for more features, that’s why we actually saw Versa do better than we expected when we launched Versa Lite, or people were looking for a deal or something, a promotion. And Versa Lite being priced at an everyday low price of $159 didn’t hit the sweet spot as well.
Heater: Is there still a commitment to that device? I mean, do you expect that to play a part in that annual refresh rate?
Park: I think that price point is still a pretty important part. There’s still a lot of people who are looking for a lower price point on-ramp. And I think Versa Lite and successors will continue to play an important role. We didn’t hit it out of the park with our first try, but we learned enough that I think future iterations will be successful.
Heater: It’s often hard to know how Wall Street will react to these announcements. You’ve frequently discussed a pivot toward a healthcare focus. What are investors looking at with regards to your bottom line?
Park: I think they’re looking at a couple things. I think, one, they’re looking at is our core device business sustainable? And despite the reaction on our last earnings call, I think we’re continuing to demonstrate that.
If you look since 2017, we’ve rapidly slowed the rate of decline in our core hardware business. 2017, we added 25% year over year decline, fell to 6% decline the year before. And with our revised guidance for this year, it’s forecast to be about a 2% decline. So that business is rapidly stabilizing.
And I think they’re looking for more proof points when we talk about our transformation from hardware to services. I think one half of that is our health solutions business, where I think if we can hit our stated $100 billion a year revenue goal, I think that’s going to build a lot of confidence. And I think the launch of our premium service in September and some proof points around that will start to build confidence as well.
Diving into Fitbit Premium
Heater: How did you arrive at the $10 price point [for Fitbit Premium]?
Park: We did some extensive market research. And we also wanted to provide a lot of value to people. A lot of the theme of this presentation is around accessibility and affordability.
So if you think that, if you have to download three or four different apps that each cost $10 a month, whether it’s Calm, Headspace, etc., that could cost you $30 to $40 a month. And so we wanted to provide something that was a lot of value, and we felt $10 a month was a pretty good sweet spot for a service that provided all in one.
Heater: What’s the quick pitch for consumers to spend $10 a month or $70 a year for yet another subscription service?
Park: The quick pitch is that it’s a one-stop shop that gives you all of what you really need to eat better, become more active, sleep better. And it’s a service that’s tightly integrated with your Fitbit device. And so with a user base of over 27 million active users, definitely for our user base, it’s a really compelling solution.
Heater: You’re focused exclusively on Fitbit hardware users?
Park: Initially, but long-term, we see Fitbit Premium as something that can be used with other devices as well, whether it’s an Apple Watch, Garmin, etc. But initially we’re focused on our existing users, because we have a lot of them.
Heater: You’re essentially asking people to log all this information. It’s a harder play when it’s less passive. People can’t lie to their Fitbit, but they can lie to an app.
Park: Well I think that’s one of the values of Fitbit Premium. A lot of the experience is actually based on leveraging the data that comes off of your device as opposed to, let’s say, a purely Calm or Headspace experience where, again, there’s no accountability, or if you look at My Fitness Pal, etc.
So if you look at the programs, they get started based on your existing device. So a program, for instance, will ask you a series of questions, but it will also look at your data to see where it should start you off. And then if things change throughout the program, then it will readjust as well.
Heater: Is the company in a good spot, with regard to hardware offerings? The line went through a bit of a purge last year.
Park: I think we’ve streamlined our lineup. If you look at trackers and smartwatches, it’s a much more simplified lineup with good, better, best in trackers and a good, better, best product in smartwatches. And I think that’s something that we’re going to maintain.
If you want more detail about Fitbit’s way forward and the future of wearables, James Park and his Fitbit co-founder Eric Friedman will join us onstage this October at TechCrunch Disrupt SF to dive into how to grow a hardware startup that’s built to last.