Why Nike Is Stepping Back From Wearable Technology

Wearable technology may be the next big thing, but exactly what form it will take (and if it will actually happen) remains to be seen.

It won't come in the form of Nike's (NYSE: NKE  ) FuelBand. The company has fired most of the team working on that product. Instead, Nike will concentrate on making software that works with partner companies' devices. Nike told 70%-80% of the 70 employees working on the wearable fitness device -- as many as 55 people -- that their services would no longer be needed, CNET reported. Some of those who were let go could find jobs elsewhere at Nike but the company would not comment to CNET about the layoffs.

As recently as the fall Nike had seemed bullish on FuelBand. At that time it had planned to offer a slimmer version of the product. That plan has been shelved as has the idea of the company designing its own wearable tech going forward.

Nike will continue to sell the FuelBand and it will continue to develop the software behind it, company spokesman Brian Strong told CNET via email.

"We will continue to improve the Nike+ FuelBand App, launch new METALUXE colors, and we will sell and support the Nike+ FuelBand SE for the foreseeable future," Strong said.

Spin it how you like but no more work will go into FuelBand's hardware while the software will remain a supported business.

What was/is Fuel/FuelBand?
"NikeFuel is a single, universal way to measure all kinds of activities -- from your morning workout to your big night out. Uniquely designed to measure whole-body movement no matter your age, weight, or gender, NikeFuel tracks your active life," the company explains on its website.

Basically Fuel is software that works like a super-charged pedometer, tracking everything from distance and speeds to goals, heart rate, and all sorts of of other things. Fuel is the software used in FuelBand, a line of sports watches, and it is also used by Apple  (NASDAQ: AAPL  )  iPhones and iPods.

How big is the wearable market?
Wearable tech is not big business yet but a lot of companies believe that it will be. Google  (NASDAQ: GOOG  ) clearly believes in wearables as the company has put significant effort into its Google Glass and the creation of contacts that do more than correct vision problems. Samsung (NASDAQOTH: SSNLF  )  is another player in wearables -- it makes a watch with a variety of the functions offered by smartphones.

While a lot of companies believe in the potential of wearable technology, for now the category is tiny. 

IDC predicted that the wearables market will reach 112 million units in 2018, according to Time. That's a little over 10% of the one billion smartphones shipped in 2013, according to IDC.

So if IDC is right (and it has been wrong on long-range projections like this before) then in four years wearables will be around 10% of the size of the current smartphone market. If that's true than Nike is right to get out.

It's harder to predict the actual dollar value generated by the market as the breadth of the category makes translating device sales into dollars difficult. Google Glass, for example, may succeed as a high-end product for doctors who need their hands free during operations. On the other hand a simple fitness wearable (like FuelBand) might become a niche hit at a much lower price.

How big is the fitness wearables market?
Wearable fitness technology has three major players, Fitbits, Jawbone UPs, and Nike. These three accounted for 97% of all fitness wearables, according to NPD. In 2013 Fitbit accounted for 68% of devices sold; Jawbone UP sales accounted for 19%; and Nike FuelBand sales made up 10% of the market.

In January, NPD estimated that the overall digital fitness device market was worth $330 million in 2013. 

Nike had $25.3 billion in sales in 2013, according to its annual report . 

Even if the fitness wearable market doubles or triples over the next couple of years, it is still very small. Nike looks likely to reach more users by integrating with existing popular tech than by developing its own.

A device may not be needed
For wearable technology to become a viable consumer category it must offer devices that do things that can't be done with tech that people already own. Much -- if not all -- of what can be done with the FuelBand can also be done with top-of-the-line smartphones and people are already buying those. Even if a wearable adds some bells and whistles for a targeted niche (say elite runners vs regular ones) that is a very limited market.

Nike appears to know that measuring athletic performance has a strong future but users may not need stand-alone devices to do that. Even if one does emerge Nike seems to understand that its place in the puzzle is building software that other companies can plug into.

To make that easier Nike has created an R&D space in San Francisco where companies (Nike partners) will be able to test their hardware with the Fuel software, CNET reported. Nike plans on publicly releasing an API this fall for Fuel, which makes it much easier for companies to tie their hardware into the fitness software.

Nike will leverage its brand as a fitness leader to create software that gives athletes the performance metrics they want. It will let tech companies do the heavy lifting when it comes to devices.

Nobody knows the future of wearables
It's impossible to predict the market for wearable technology a few years out because we don't even know what form factor smart phones will take. If smart phones become flexible devices that can bend around your wrists, are they still phones or have they become wearables?

Nike is smart to bet that the form factor of fitness wearables is irrelevant. The company is well-positioned to know what information athletes will want but it is less well-positioned to know if they are willing to buy stand-alone devices to get the information. By continuing to work with partners (including Apple) Nike assures that it can market athletic performance tracking software to the widest possible user base.

Yes, Nike is running the risk that another company will create a form of wearable technology for athletes that's so amazing that it becomes its own category. However, that seems much less likely than the idea that people will integrate athletic uses into their smartphones. FuelBand was probably always a bad idea but the Fuel software has the potential to essentially become the operating system for athletic performance metrics. 

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