Because the Ionic smartwatch failed to turn around Fitbit's flagging fortunes, it's now counting on its new "mass appeal" Versa smartwatch to succeed. If it doesn't, Fitbit is going to fall further behind in the wearables market.

Long the dominant player in the space it largely defined, Fitbit's multiple miscues and failure to respond to a changing marketplace have already caused it to lose significant market share. It trails both Apple and Xiaomi.

Man wearing swim cap, goggles, and Fitbit Ionic

Image source: Fitbit.

A growing market

According to the market researchers at IDC, the wearables market continued to expand in 2017. Wearable device volumes rose 10.3% to 115.4 million units, but that was more than 2.5 times lower than the growth rate achieved the year before, and comes as the Apple Watch is resurgent. 

For quite a while Apple has trailed just behind either Fitbit or Xioami for the top spot, but with the release of the Apple Watch 3, the tech titan claimed a decisive lead in the fourth quarter. It shipped 8 million units, or 48% more than the 5.4 million units Fitbit shipped.

That gave Apple a 21% share of the market in the fourth quarter, well ahead of Fitbit's 14.2%, and put Apple in the lead for the year with a 15.3% share, ahead of Xioami at 13.6% and Fitbit at 13.3%.

Vendor 2017 Shipment Volume (Millions) 2017 Market Share Change (YOY)
Apple (NASDAQ:AAPL) 17.7 15.3% 55.9%
Xioami 15.7 13.6% -0.3%
Fitbit (NYSE:FIT) 15.4 13.3% -31.6%
Garmin 6.3 5.4% -0.8%
Fossi 4.9 4.3% 133.1%
Others 55.5 48.1% 19.1%
Total 115.4 100%

10.3%

Data source: IDC. YOY = year over year.

Fitbit's Ionic had several problems, among which was it was almost as expensive as the Apple Watch 3. Although it had GPS capabilities, Fitbit chose to develop its own operating system rather than going with Android and it had few compatible apps to go with it. Considering the far more robust Apple ecosystem, it's clear why the Ionic failed.

Another problem for Fitbit is that the market for devices has split. On the one end you have pricey, feature-rich smartwatches like the Apple Watch and at the other you have cheap, single-purpose wristbands such as those made by Xiaomi. Fitbit's products fit uncomfortably in between the two, with a watch that is almost as expensive as the leader, but not as capable as its rival, and fitness bands that are more much expensive than the cheap imports.

Another attempt at a smartwatch

Which is why there's a lot riding on Versa. While it will still run Fitbit's proprietary OS, it will reportedly be waterproof and will have a smaller form factor like the devices Fitbit acquired when it bought Pebble. While that design feature should make it more attractive to women as well as men, as will the increased functionality it will reportedly include (such as contactless payments), there won't be GPS capabilities on this device. That could be a significant missed opportunity considering the Apple Watch includes it.

The key to success, however, will be its price point. Hopefully by this point Fitbit realizes if it wants to have a watch with mass appeal it will need to make it more affordable, and perhaps that's why GPS was dropped. Many are expecting it to be unveiled within the week.

Now it remains to be seen if Fitbit can get back on track. IDC's report suggests that by trying to transition into the more expensive smartwatch segment, Fitbit lost sight of its goal and shipments declined by more than 30% last year.

Stethoscope on a smartphone on a laptop

Image source: Getty Images.

A healthy turnaround in the future?

Following Fitbit's earnings report last month showing the number of devices sold in the fourth quarter plunged 17%, the stock cratered. While CEO James Park teased a new "mass appeal" smartwatch without giving any details, the device maker's real pursuit may be coming up with alternative streams of revenue.

Fitbit has inked partnerships with both DexCom and UnitedHealth Group, while also participating in the FDA's digital health software precertification program and the National Institutes of Health's Precision Medicine Research Program to use fitness technology to improve the ability to prevent and treat disease. And, of course, it just acquired health coaching leader Twine Health.

By further embedding its devices into healthcare routines, Fitbit could make its fitness trackers a key component of holistic lifestyle improvements through better monitoring and outcomes. Yet it's not the only one involved in these endeavors, as Apple is also pursuing similar goals, so it still needs its devices to register with consumers.

Things haven't been going Fitbit's way lately and it remains to be seen whether it can alter the outcome. A lot is riding on its new device as that will inform whether any of its other dreams can come to fruition.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends FOSL and UNH. The Motley Fool has a disclosure policy.