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Fitbit software outlook -5

19:09 03-Dec-17


It's been a month since I've focused on Fitbit, and over two months since the Ionic and accompanying SDK were made available.  Here's the calendar of events until the end of the year, followed by my notes on what I'm seeing.

Date
 Event
9/25
 SDK available
10/1
 Ionic available
11/8
 App Contest Announced
11/17 App Gallery Open for Submissions
11/22
 bug fix SDK release
11/28 Developer Evangelist hired
12/8
 Sport & Fitness winner
12/15
 Health & Wellness winner
12/22
 Transportation & Local,  App Grand Champ

The overall impression that I'm getting is that Fitbit is not taking the right steps to have its software ecosystem achieve escape velocity.   The Ionic launched with only the following software avallable: Wallet, Strava, Starbucks, *Settings, *Today, Timers, Music, *Exercise, Alarms, *Weather, Relax, Pandora, *Coach.  Those are still all that's available and starred apps can not be uninstalled.  As a programmer myself, I also know that its best not the rush the software development process, if you want quality results. 

As an investor, though, I think it's obvious that, ideally, the App Gallery should have been unveiled with many choices already in order to leverage the holiday sales season.  It may still make an appearance in the next week or two but, without a broad selection of functionality, it's likely to be too little, too late.  Specifically, I think Ionic software will be weak for the following reasons:
  1. There is still no emulator or standalone development platform, like the ones Pebble offered.
  2. The app contest is only open to U.S. developers, and prizes are fairly paltry.  I continue to think international markets will be crucial, and have already documented how the Ionic does not adapt well to those markets.
  3. There is no direct way for third party developers monetize their work.  Trial apps, with payments are in the works from Kizel pay, as was done with Pebble, but lack of direct support may be part of what helped sink that platform.
Third-party developers matter because they bring customization and competition to a platform.  That's how Android got momentum, and now Fitbit has a chance to make itself a conduit for innovative software development that would bridge the iOS and Android worlds.  Developers are not going to do that for free, though.  They've been learning, and what they see is that the list of apps which can not be removed points to the sort of favoritism that Google has recently been getting in trouble for.  That only stifles the innovation that Fitbit will need in order to survive.  

The reason I make such a big deal about this is that software is likely to have a major impact on market share and my opinion is that Fitbit absolutely can not tolerate ceding significant market share.  Doing so would weaken its case with health care and banking partners.  The size of the customer base and dataset is paramount to both, and the latter is already looking like a trouble point.  Fitbit promised broad support for its payment platform but not much has materialized so far.  Management seems to be taking a lean inventory approach with the Ionic in the meantime, presumably until the software is ready.  I'd say that was smart if I could see any sign at all that things will go that way soon.

Holiday sales can easily make or break a retailer, and that's all more true with a new product.  I still think the Ionic offers the best hardware, however, I'm certain that alone won't be enough for success.  My writeup on the last report highlighted the strength of Fitbit's brand, and said I was willing to take a wait-and-see approach.  Fitbit still has the balance sheet to run the marathon, and FIT shares have rallied over 15% in a month off the post earnings lows. Under the circumstances, I'm now more inclined to take profits than continue to hold risk.  Management built the balance sheet primarily by bringing innovative cheap hardware to market first.  There will be much more such innovation to come, but Fitbit is no longer in the startup role, and I expect to see it outbid in its efforts to work with those who are.

At this stage in its development, Fitbit needed to be a step ahead on software, just as it once was on hardware.  Instead, I see management taking a poor approach to the ecosystem that will define the next phase of the company's existence.  Perhaps that will change, but probably not in time.  The brand may be strong, but I'm not at all sure it can tolerate a year of questionable software development.  The wearable market will be a long race, and I'll continue counting the steps.  However, Fitbit appears to have stumbled out of the blocks of this latest leg.