Nike (NYSE:NKE) is quitting the wearable computing hardware game. The company recently laid off most of the team that had been working on its FuelBand fitness device and discontinued plans for follow-ups. The move might seem odd, given that the wearable computing push is starting to pick up steam and the company had a solid share of the fitness tracking market. Its FuelBand line wasn't as popular as the products from Fitbit, but Nike still had a good share of the market and looked to enjoy certain advantages inherent to having been in on the ground floor.
Sales of FuelBand, Fitbit, and Jawbone wearable fitness trackers accounted for 97% of retail sales in 2013, with Fitbit claiming approximately 67% of the market for the year. Estimates from NPD Group suggested that the digital fitness tracker business was worth approximately $330 million in 2013, which is nothing to sneeze at considering that sales were effectively divided between three competitors, yet small enough to give the impression of a nascent market potentially awaiting an explosion. There's also money to be made in selling user data collected by the devices. Why, then, has the company abandoned its hardware efforts, and what does this move say about the short-term future of wearables?
Nike steps out of Apple and Google's race
Much of the speculation surrounding Nike's exit from wearable hardware has revolved around the entrance of Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) into the market. Apple's smartwatch, rumored to release this year, is viewed as a potential disruptor that could kill demand and growth for dedicated fitness trackers.
In addition to Google's smart watch projects, the Internet giant recently unveiled Android Wear operating system would have been competing against FuelBand from a different angle. Given that Nike is instead pursuing a software-oriented position in wearables, and the potential for a partnership with Apple, there's a good chance that Google and the sneaker manufacturer could wind up on opposing teams in the wearable game.
Will Nike team with Apple on future wearables?
Following the news that Nike would no longer be pursuing additional FuelBand projects, many analysts were quick to point to the company's historically cozy relationship with Apple as an indication as to where the Swoosh might land next in the realm of wearables. Apple CEO, Tim Cook, has been on the Nike board for over nine years, and there have already been a number of team-ups and cross-promotions between the companies.
The Nike+ app is currently included with the default version of the iPhone operating system, and it's possible that Apple could join with Nike to give its impending smart watches a fitness-world push reminiscent of 2006's Nike+ Running on iPods. A partnership could be announced as early as June, when Apple will host its Worldwide Developers Conference in San Francisco.
Ditching FuelBand is the right play
Whether or not Nike and Apple wind up in bed together for an upcoming wearables push, ditching the FuelBand is probably a smart move for the sneaker company. Current fitness trackers and wearables already rely on smartphone integration, and platform holders like Apple and Google look to enjoy increasing advantages over third-party hardware that hinges around connections to their respective ecosystems. The Nike brand has enough cache to be a valuable and enticing asset on the software front, but buckling down for prolonged competition with the biggest players in tech would make little sense for the company.
If Nike hoped to maintain its place in the wearable hardware market, the company would need to undergo significant structural changes. The the team working on the FuelBand project numbered only 70 people prior to the recent layoffs, hardly the engineering army that would be necessary to stand against Apple, Google, and Samsung in the developing space. Growth of smartwatches and other wearable devices hinges on the assumption that they will provide meaningful functions and data far beyond that supplied by the current line of products, which some have described as little more than advanced pedometers.
Nike had the cash and design experience, but lacked necessary infrastructure
Being competitive in the wearable game would also require a huge advertising push and a healthy dose of fashion savvy. Theoretically, Nike has the assets to hack it on both fronts, but the evolution of wearables to include on-board displays and more sophisticated computing hardware would have placed the company soundly out of its element. Joining an ecosystem as a software provider with a strong brand is the more appealing path for Nike.
Are dedicated fitness trackers about to evaporate?
It's looking like early entrants in the wearable market will be stamped out by mobile computing's power players. Products like the Fitbit line may be able to survive in the short term on affordability and fitness specialization, but more capable smart watches will make such offerings redundant if the much-hyped devices catch on with the broader public.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Apple, Google-Class C Shares, and Nike. The Motley Fool owns shares of Apple, Google-Class C Shares, and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.