Whispers around Nike (NYSE:NKE) dismantling its FuelBand hardware team caused the wearable-tech world to fear that health-monitoring wristbands, a major component of the emerging wearables market, are facing a downward spiral. Nike is not giving up on activity tracking, altogether. It's shifting its focus to software instead. 

While wearables are hot right now, there are still in their infancy. In terms of consumer adoption, there is plenty of room to gallop. Research firm BI Intelligence believes that activity trackers and fitness bands will be the devices that push wearables into the mainstream. However, these devices have so far failed to live up to analysts' expectations sales-wise, raising a red flag for the category as a whole. Not to mention, more than half of U.S. consumers who have owned a fitness tracker no longer use it, according to a white paper from Endeavor Partners.

Did Nike make the right decision to phase out the FuelBand? More importantly, what needs to be done for activity bands to be widely accepted as gadgets we can't live without?

Nike shifting away from hardware is good news for Nike and Apple...

If we take a look at the wearables landscape so far, we'll see that health and fitness trackers from the likes of Nike, Jawbone, and Fitbit occupy the largest space. The second and less prominent segment of the wearables market consists of smart watches. The third segment includes augmented-reality devices like Google Glass.

Nike claimed just 10% of the market for fitness trackers sold during the past year through third-party retailers and e-commerce outlets such as Best Buy, Wal-Mart, and Amazon. That was a distant third behind Fitbit, which dominated the market with an almost 70% share, and Jawbone, which scored a 19% share, based on NPD Group's latest figures.

Moreover, unlike wearables such as Google Glass, which function independent of any other device, these gadgets operate partially stand-alone. They achieve full functionality only when connected to a smartphone, tablet, or personal computer. To put in other words, they don't have a real reason to exist. This is partly why many early adopters stop using them after a while.

For Nike, it's likely that there's more money to be made in setting its sights on further developing its software and trying to lure hardware experts with solutions that outclass what's already offered in the market. Being an app that can run on everything could prove to be a more lucrative alternative.

A new deal with Apple (NASDAQ:AAPL), which is getting ready to enter the wearables ring, might already be in the works.

"I will say that the relationship between Nike and Apple will continue," Nike CEO Mike Parker told CNBC when asked about a partnership with Apple. "And I am personally, as we all are at Nike, very excited about what's to come."

...but not for wearables as a whole

Overall, for fitness bands to achieve what they're meant to achieve – namely, push wearables into the mainstream – the biggest challenge they face is finding a reason to exist, other than being a state-of-the-art pedometer that can easily be replaced by a smartphone. That is, if fitness bands, and wearable-tech gadgets in general, are truly ever going to reach long-term utilization, both the hardware and software ends need to get a whole lot more sophisticated and smarter. Key players will have to excel at both. 

A recent Financial Times article pointed out that smaller players have made a similar shift from fitness bracelets to just building apps for the iPhone 5s, since limited hardware capabilities within the nascent wrist-worn space posed several challenges. But isn't this a step backwards?

As Jawbone CEO Hosain Rahman explained during TechCrunch Disrupt NY a couple of days ago, when it comes to wearables, marrying explicit design with function and incorporating innovative software into an equally innovative physical experience is what adds value for the consumer. The ultimate goal should be to service a more comprehensive user experience, not just satisfy a mild curiosity in a new technology.

Final thought

Nike's decision to redeploy its efforts away from hardware toward apps could indicate and even fuel a broader trend among fitness trackers to content themselves with linking to, syncing with, or working alongside a smartphone. If that's the case, the size, scope and future profitability of wearables could be in jeopardy. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.