In this segment from Industry Focus: Tech, Motley Fool analysts talk about the lack of wearables booths at this year's Consumer Electronics Show, and what that means for the wearables market; where most consumer spending on wearables is actually going nowadays; and why wearables have quietly fallen off the map in the last year.
A full transcript follows the video.
This video was recorded on Jan. 19, 2018.
Dylan Lewis: I think the first thing I want to talk about with you is looking at Fitbit (NYSE:FIT) and the wearables space. And with everything we're going to be talking about today, at least in the first half of the show, we're going to be looking at trends that were really big tech trends a couple of years ago, and where they are now and what happened between those, to this point where, Fitbit almost had zero presence at CES.
David Kretzmann: Yeah, Fitbit was still there, but on the actual floor itself, I didn't even see a booth that they had. And compared to the last year or two, this was the third year that I've been at CES, they had a much heavier presence, where they had a big booth, they were displaying their products, really hyping up everything within that wearables space. And I think another company that was completely absent, they didn't even have a private meeting room or anything this year, was Under Armour. Compare that to last year, when not only did they have a massive booth, and they brought in Michael Phelps and a lot of their star athletes, their sponsored athletes. Kevin Plank also delivered the final keynote at CES last year, and that keynote was almost entirely talking about connected fitness category and the three acquisitions they had made within that connected app, connected fitness space. So, the fact that Under Armour went from delivering the keynote, being the star of the show, having this star-studded display, to no presence at all at CES, I think really tells you what's happening in that category.
Lewis: I think there was a 12-month period, or maybe a four-month period, where Kevin Plank was basically on the conference circuit. He was at CES, and then he was a keynote at South by Southwest as well, where I was in Austin.
Kretzmann: Oh, wow, I didn't know that.
Lewis: And I remember the same thing, where I was like, wow, this is big for them. They're seeing these acquisitions as big growth levers for Under Armour. And to see them not even be there now, it's like, ooh, this has not really been working out for them.
Kretzmann: Yeah. And we've seen that story played out over the course of 2017. I didn't realize that they were also at South by Southwest. I actually might remember hearing one of your podcast appearances talking about that. But it wasn't much longer after South by Southwest, I think it was in the summer of 2017, when they started to write off some of those acquisitions that they made. They spent over $700 million acquiring three of these connected fitness apps. So they're finally doing the mea culpa, saying, "Oops, you might have overpaid for that, we're going to start writing that off." They had a lot of leadership changes. And finally, you see Kevin Plank, someone who is, obviously, incredibly confident and a very powerful founder and CEO, basically admitting, "We made some mistakes, and we need to change gears a bit." They're still in a little bit of a mini-turnaround stage, but man, they made a huge bet on connected fitness that so far seems to be a bit of a blunder. Not really clear how they're going to make money with those connected fitness apps.
Then I think that extends to Fitbit as well, where these devices wear off people. You might buy one of these fitness trackers and use it for a couple of months, but it's not much of a repeat business. There's not really a reason that people keep going to these fitness trackers. Then, the people who really do like these fitness trackers, why wouldn't you just go with an Apple Watch, which, obviously, it's Apple, so it has that going for it, but also, the latest versions of the Apple Watch, it has the GPS tracker built-in, it has mobile data built in, just in general a better device than a lot of these other trackers that are out there. And it's Apple.
Lewis: Yeah. When you have Apple backing something, particularly on the software side, you have that app developer community as well. So, functionality is going to be a lot more robust with an Apple device than something that has a much smaller developer community.
Kretzmann: Absolutely. It's kind of puzzled me over the last couple of years, because people will point to the Apple Watch as being a flop or not doing as well as it could, but they're comparing that to the iPhone. But the Apple Watch still has over 50% share of the smartwatch category, so pretty much by any definition, it's been an incredible success. That's just a very tough competitive beast to go up against when you're a Fitbit or an Under Armour, companies that are just making these one-off devices that don't really keep consumers coming back for more in the same way that the Apple app ecosystem does.
Lewis: And you think about the presence of companies at CES, looking at the wearable space, thinking about hardware manufacturers, there's Fitbit, but you look at Jawbone, this is a company that existed and is now in liquidation, selling off most of their assets. And Pebble sold itself to Fitbit. So, of some of the other pure-play companies in that space that had a decent size to them, a decent chunk of the market, two of them aren't there anymore. So it stands to reason that you're not going to see as much of that at CES.
Kretzmann: Yeah, consumer electronics is just a brutally competitive space. It's a very tough space to build some sort of long-term competitive advantage. Apple is obviously the crown jewel, when you see a company that keeps people coming back for more. They're raising the prices on iPhones, they're launching new devices, and people are just stuck within this software and app ecosystem. I think if you're a Fitbit or a GoPro, or some of these latest consumer tech companies -- you really have to look at Garmin as an example of what could go wrong when your main product, whether it's a camera or a fitness tracker, becomes not just a product but a feature of a device like an iPhone. And I think that's really what happened with Garmin, where they dominated GPS trackers in the 2000s. The company and the stock did very well. But eventually, the GPS tracker was just integrated into virtually every device, and they lose that competitive advantage. I think we're seeing something similar happen with Fitbit, where that fitness tracker will just become a default feature in your iPhone or your smartwatch, and you don't necessarily need Fitbit for that feature.
David Kretzmann owns shares of GPRO, Under Armour (A Shares), and Under Armour (C Shares). Dylan Lewis owns shares of AAPL, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends AAPL, Fitbit, GPRO, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.