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1 Key Advantage Apple, Inc. Has Over Fitbit

By Evan Niu, CFA – Aug 6, 2015 at 2:00PM

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Fitbit has an abandonment problem. Apple Watch does not.

Source: Fitbit.

It may not look like it quite yet, but there's a storm brewing. The wearable fitness market is exploding right about now, and while Fitbit (FIT) is currently the undisputed market leader with 85% market share, Apple (AAPL 0.66%) hopes to change that in the coming years with Apple Watch. On one hand, it's possible that there's limited overlap between the two companies' target markets, but inevitably the pair will have to compete.

Much like how the iPhone disrupted many markets for single-function devices like music players and point-and-shoot cameras, Apple Watch could potentially do the same thing for wearable fitness trackers, even if that particular market is barely older than the smartwatch market. Why wear two devices when one will suffice?

More specifically, there's an important challenge that Fitbit faces that isn't necessarily related to Apple. Fitbit detailed this red flag in its prospectus: Only half of its registered users qualify as active users. That suggests that Fitbit has a problem with its user abandonment rate, which just so happens to be a department where Apple excels.

To read between the lines or to not read between the lines?
Fitbit has warned investors not to read too deeply into the active user metrics, saying that the figures aren't accurate proxies for engagement. But at the same time, how can you not be worried? After all, despite its best efforts thus far, Fitbit is still predominantly a hardware company, in which case eventually (after the adoption phase) it will rely on consumer upgrades to drive revenue. No one upgrades a device that they don't use.

Think about the most common New Year's resolution out there: to start exercising and get in better shape. Roughly 80% of the New Year's crowd that sign up for gym memberships cancel by mid-February. My wife once had a Jawbone Up; we don't even know where it is anymore. What happens if the same thing happens to Fitbit?

Last year, Endeavor Partners put out a white paper on wearables, and the researcher found that abandonment rates are incredibly high -- a third of users abandon wearables after six months. It's worse for activity trackers than for smartwatches. This was well before Apple Watch launched. For now, wearables are still in the adoption phase, so Fitbit has plenty of runway ahead of it, but in the long term, it could have a serious problem as the market matures sales transition from first-time purchases to upgrades.

Apple Watch usage is strong so far
It's already widely documented how little Apple was willing to say about Apple Watch's sales performance last quarter. Even though Tim Cook wouldn't elaborate about financials, he did mention some encouraging data on customer satisfaction and usage:

The feedback from Apple Watch customers is incredibly positive and we've been very happy with customer satisfaction and usage statistics. Market research from Wristly measured a 97% customer satisfaction rate for Apple Watch and we hear from people every day about the impact it's having on their health, their daily routines, and how they communicate. Our own market research shows that 94% of Apple Watch owners wear and use it regularly, if not every day.

The Mac maker also mentioned that messaging and activity tracking are the most popular features, while social networking apps are getting the most use among third-party apps. This is where Apple has a key advantage. Despite the fact that I personally returned my Apple Watch, I'm pretty sure that I'll buy, keep, and regularly use one in the near future as future-generation models add functionalities and improve performance.

Source: Apple.

Apple is much better at maintaining high usage levels, which maximizes the odds of future upgrades. That's one reason why Apple has always emphasized usage statistics over market share.

Race to become each other
Fitbit seems aware of its abandonment challenge. CEO James Park told Fortune last month that his solution to the abandonment problem is to continue adding features that bolster usage and engagement, such as text messaging. In other words, Fitbit eventually wants its devices to expand beyond single-purpose activity tracking.

You could even say that Fitbit wants to create a platform, which is much easier said than done, especially when you're talking about competing with the most effective platform operator in history. Meanwhile, Apple would certainly like to be the undisputed leader of the activity tracker market.

Can Fitbit become Apple before Apple becomes Fitbit? Probably not.

Evan Niu, CFA owns shares of Apple. The Motley Fool recommends and owns shares of Apple. 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.

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