Global shipments of wearables rose 22% annually to 32 million units during the third quarter of 2018 according to IDC. That growth wasn't surprising: Fitness trackers and smartwatches are becoming increasingly common. But the growth of Xiaomi (NASDAQOTH:XIACF) -- which claimed the top spot with a 21.5% share -- likely stunned some investors.
Xiaomi tied Fitbit (NYSE:FIT) for first place a year ago, with each company controlling 13.7% of the market, while Apple (NASDAQ:AAPL) ranked second with a 10.3% share. However, Fitbit's share dropped to 10.9% during the third quarter, putting the former market leader in third place, while Apple remained in second with a 13.1% share.
Between the third quarters of 2017 and 2018, Xiaomi's shipments surged 91% to 6.9 million units, fueled by the launch of the Mi Band 3 and its expansion beyond China into fresh markets like India, Europe, the Middle East, and Africa. The low price tag of the Mi Band 3 (at about $30) made it a top choice for budget users and emerging markets.
Meanwhile, Fitbit's shipments slipped 3% to 3.5 million units as stronger sales of the Versa, Charge 3, and Ace only partly offset softer demand for its traditional fitness trackers. Apple's shipments jumped 54% to 4.2 million units, buoyed by the launch of the Apple Watch Series 4. Should Fitbit and Apple worry about Xiaomi's meteoric growth, or is there still room for all three companies to thrive?
Xiaomi's growth could threaten Fitbit
Fitbit's revenue growth slowed to a crawl over the past two years as sales of its lower-end fitness trackers decelerated and rivals like Xiaomi, Apple, and Huawei entered the market. Smartphones also added basic step-tracking features, while smartwatches added more complex apps and workout features that rendered basic fitness trackers obsolete.
Fitbit pivoted away from the fitness tracker market with the smartwatch-like Charge 3, the Versa smartwatch, and the Ace for kids, but it merely curbed its declines instead of generating strong year-over-year sales growth. It's also expanding its digital ecosystem with smartwatch apps and health record services, but it's unclear if those initiatives can lock in more users. For now, Fitbit is treading water and cutting costs to improve its non-GAAP profitability -- which could limit its marketing and R&D capabilities. Analysts expect the company's revenue to fall 7% this year and for its net loss to narrow.
Meanwhile, Xiaomi's partner Huami (NYSE:HMI), which actually makes the Mi Band, sells a wide range of Amazfit smartwatches (including the sub-$90 Bip) that could disrupt the smartwatch market in the same manner as the fitness tracker market. If that happens, sales of Fitbit's Versa and Charge 3 could eventually peak.
But Apple probably isn't worried
Apple probably isn't worried about Xiaomi because the two companies serve different markets. Xiaomi's fitness trackers work with iOS devices, but Apple Watch's watchOS offers much deeper integration with a user's iPhone apps.
Apple users also tend to buy first-party products that fit neatly into its ecosystem, and they're willing to pay a premium. In other words, there might be an overlap between Apple's high-end users and Xiaomi's budget consumers, but it likely represents a small sliver of Apple's core market.
Therefore, Apple is mainly competing against itself in the smartwatch market, so its 54% year-over-year jump in shipments is impressive. The Apple Watch isn't a significant driver of hardware sales growth like the iPhone, iPad, or Mac, but it represents another way for Apple to lock users into its walled garden.
The expansion of that prisoner-taking ecosystem -- which also includes the App Store, Apple Music, iTunes, Apple Pay, and other services -- boosted Apple's higher-margin Services revenue (16% of its top line) 17% annually last quarter. The growth of that unit should gradually offset Apple's dependence on the iPhone, which is approaching a cyclical peak.
The market is still evolving
Gartner expects global wearable device sales to rise 26% this year, with smartwatches leading the charge. The firm expects smartwatch shipments to surge from 53 million this year to 115 million in 2022 -- so there could still be plenty of room for Xiaomi, Fitbit, Apple, and other companies to grow without trampling each other.
Investors should also note that this market is constantly evolving, and early leaders like Samsung have fallen out of favor. Therefore, Xiaomi is the top dog for now, but it could struggle to maintain that lead over the next few years.
Leo Sun owns shares of Apple. 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 Gartner. The Motley Fool has a disclosure policy.