In this episode of Industry Focus: Technology, Sean O'Reilly and Dylan Lewis recap the 2016 Consumer Electronics Show.
In wearables, Fitbit (FIT) revealed its new product, the Blaze, but Wall Street focused on the new entrant Under Armour (UAA -1.93%) and concerns of an increasingly competitive market for fitness tracking products.
Netflix (NFLX -4.49%) also made headlines, detailing its international expansion plans and teasing some new original series.
A full transcript follows the video.
This podcast was recorded on Jan. 8, 2016.
Sean O'Reilly: What happens in Vegas doesn't stay in Vegas, on this tech edition of Industry Focus.
Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Virginia. It is Friday, Jan. 8, 2016, and joining me to talk about the Consumer Electronics Show is the man, the myth, the legend, Dylan Lewis. Happy New Year, man!
Dylan Lewis: Happy New Year! It is so nice to be back.
O'Reilly: I forgot what you looked like. I was like, agh.
Lewis: Well, the other Industry Focus shows, I think, still happened throughout the holidays. But because we're on Friday, with tech...
O'Reilly: Game over. Even the Tuesday before Christmas, I did a consumer goods show with Vince.
Lewis: We got hit with New Year's Day and Christmas Day for the holidays.
O'Reilly: To our loyal listeners, we missed you. We hope you missed us.
Lewis: It's nice to be back. I'll say, I was a little out of rhythm. I almost deleted all my notes today by accident.
O'Reilly: How did they get it back? This is actually a tech question. I'm curious.
Lewis: Sean from tech, big-ups to him for using file recovery.
O'Reilly: You deleted-deleted.
Lewis: I deleted-deleted them, and he went into the innards of Microsoft Office and found them and recovered them. Which is awesome, because this was like 20 minutes before the show and I had done all my prep already.
Lewis: Thank you, Sean.
O'Reilly: How did you do that?!
Lewis: I hadn't saved the file that I was working on. My fault. You live and you learn.
O'Reilly: How did you get through college?
Lewis: That's why we use Google Docs now, because they auto-save.
O'Reilly: Moving on. CES. For those of you who don't know what CES is, it's the Consumer Electronics Show, and I don't think I'm exaggerating to say it's like, Christmas, Kwanzaa, New Year's Day, 4th of July, and various other holidays for the tech industry.
Lewis: Yeah. It's over 100K people every year descending on Las Vegas, and just geeking out over consumer tech stuff. It's a pretty awesome time.
O'Reilly: And possibly to gamble. We don't know. Anyway, sounds like there's a lot of wearable tech news out of CES.
Lewis: That's one of the new categories that I've seen a lot of news that is relevant to investors now, which companies that are currently public.
O'Reilly: Did you see the Oculus Rift pricing and everything? For the low, low price of $599, you too can get motion sickness!
Lewis: That's actually higher than a lot of people thought it was going to come in at.
O'Reilly: What did they think?
Lewis: A lot of people were expecting $350, $400. Which is, I think, what had been teased. So there was kind of a weird market reaction to that.
O'Reilly: So, what's up with Fitbit? Talk to me.
Lewis: Fitbit was one of the first big headlines coming out of CES this year. They unveiled the Fitbit Blaze, which is basically an update to their line. It's a new product. It's really kind of like an Apple (NASDAQ: AAPL) Watch in its design. When you look at a Fitbit...
O'Reilly: Does it still look... I don't want to say rubbery, but do you know what I'm talking about?
Lewis: Oh, no, it's a departure from that design, and it looks much more like a smartwatch than a fitness tracker band.
O'Reilly: [COUGHS] Apple Watch.
Lewis: But the company is calling it a fitness watch rather than a smartwatch, and we can get into some of the things that it can and can't do, and maybe why they're doing that, as an explanation. But some highlights. There's a five-day battery life on the product.
Lewis: Which, obviously, compares very favorably to the Apple Watch's.
O'Reilly: I want one of those batteries in my computer. Geez.
Lewis: I think Apple Watch has like a 24-hour life.
O'Reilly: At best.
Lewis: Yeah, about a day. It retails for $200. It's kind of on the expensive side for Fitbit, but it's still cheaper than the Apple Watch. I think there's one product in Fitbit's line that's more expensive than that.
O'Reilly: Can I get the Blaze in gold like the Apple Watch and pay like $10,000?
Lewis: They were saying...
O'Reilly: Are you serious?! I was joking!
Lewis: No, not that premium model, but you can accessorize the Blaze a little bit more than the other Fitbit options, and you can put the display out and sub in other holders for it.
O'Reilly: I was telling a joke, and here you go and...
Lewis: That's the beauty of not overly scripting the show. We get moments like that. But I think, when you look at the product, there are some major design whiffs here, and I've seen some chatter online about it. The product does not support third-party apps. And this is something where it's very clear, they're calling it a fitness watch rather than a smart watch, when you're using a smartwatch, you expect to be able to have 3rd party apps come in...
O'Reilly: That's, arguably, why the iPhone beat out Blackberry in the early days, because they were so app-friendly. People love apps.
Lewis: Yeah. And you can build out the ecosystem in a much more scalable way if you allow other people to play in your sandbox. And you can have people interact with stuff they're already using on your platform. So, that's kind of a curious thing, a bit of a head-scratcher.
O'Reilly: Was that a conscious decision? Were they incapable of doing that? You see what I'm saying.
Lewis: I don't know if they thought there was like, by not allowing third-party apps on there, we'll insulate ourselves, but I don't know why they would have done that. It seems like a limiting move for the product. One of the other weird things it was, there's a lack of GPS connectivity. So, the next step up product that Fitbit has...
O'Reilly: That's important for running, right?
Lewis: Yeah. It's something that, with the Blaze, you can sync up to the GPS tracker on a smartphone, but it is reliant, it's a secondary device because you're relying on the smartphone. And one of the other things, and I think this is another item that makes it clearly a fitness watch and not a smartwatch in and of itself is, users can receive text call notifications, but they cannot respond to them on the watch itself.
O'Reilly: Well, I mean, you could get a health alert or something.
Lewis: But you could be aware that you're getting something. But I think part of the beauty of the Apple Watch and things like that is...
O'Reilly: It's got the little scrolling thing.
Lewis: There's a little bit more buildout there. So, the market... it didn't...
O'Reilly: This was bad. This was the bad part, ladies and gentlemen.
Lewis: No, they didn't respond very favorably to it. I think the stock opened at, like, $30 in 2016, and it's now around $21, $22. Which is a huge haircut. Granted, we are in a pretty big contractionary period over the last couple days.
O'Reilly: Yeah, which China and everything.
Lewis: Huge China concerns. So, there's been a market sell-off anyways.
O'Reilly: The Blaze wasn't the only problem to the market for Fitbit, though.
Lewis: Yeah, there have been a couple other issues. I think one of the things that people who really like Fitbit were curious about is, they broke out this new product, and it's in this go-between area...
O'Reilly: And it looks like the iWatch.
Lewis: And it looks like the Apple Watch. But they didn't add any refresh to the Charge HR devices, which are their flagship -- like you talked about earlier, like the rubberband products that they're really known for.
O'Reilly: And you would expect a tech company to regularly update their stuff.
Lewis: Yeah. I think those products are more than a year old at this point. If you're going to make a splash with a product unveiling, it's got to be something like that. So, not really paying attention to their core products quite as much maybe worried some people. But there's also the news that there's a class action lawsuit against Fitbit coming, and I believe, I saw the news coming out of San Francisco, I don't know if that's where the suit will actually take place or if that was the news organization that was breaking it. But, basically, it has to do with the heart rate monitoring on the Fitbit Charge HR and Surge models.
O'Reilly: Is it too fast or too slow?
Lewis: The plaintiffs are alleging that it was undercounting their heart rate, which is something that is probably not, right?
Lewis: If you think you're at... I don't know what a reasonable heart rate is. But if you're 40 above what you should be...
O'Reilly: 120 or something like that.
Lewis: Yeah. There are some heath risks there.
O'Reilly: Was it off by five or 50?
Lewis: It was off pretty significantly. Someone cited 40 as an example of what it was off by. So, obviously, not good news. But I think, you look at what was basically an $8 drop in stock price, it had more to do with what another company unveiled at CES.
O'Reilly: Wait! If it wasn't the Blaze and the pricing and the comparison to the Apple Watch, and it wasn't to the class action lawsuit, what was it, Dylan?
Lewis: It was Under Armour.
O'Reilly: I actually went to their store at Christmas time.
O'Reilly: Yeah, it was nice.
Lewis: In Indiana?
O'Reilly: Yeah. It's huge, it's nice, they've got all their stuff.
Lewis: A nice retail experience?
O'Reilly: Yeah, it was. And I was able to breathe, just like their shirts. Big and open.
Lewis: Well, soon, in the Under Armour stores, you will be able to check out some of their connected fitness products.
O'Reilly: Oh, boy!
Lewis: They're getting into this market as well. They unveiled the UA HealthBox, which is kind of like this full-suite solutions type thing, which retails at $400. They're billing it as the world's first connected fitness system made by athletes for athletes.
O'Reilly: This feels like a good move for them. Have you seen all the shoes? They're clearly going after Nike with that.
Lewis: Yeah, with all the NBA deals they're signing, getting Steph Curry ... I mean, yeah. They're chomping at the bit there. So, within the Health Box is three main products: UA Band, which is $180 outside of the HealthBox packaging. It's basically a health tracker, it automatically tracks steps, distance, resting heart rate, and sleep, very similar to some of the base level Fitbit offerings. There's the UA Scale, which is a Bluetooth and Wi-Fi enabled scale that measures weight and body fat percentage. And lastly, the UA Heart Rate...
O'Reilly: They can do that?
Lewis: Yeah. The UA Heart Rate, which will retail $80 as a stand-alone, which is a compact heart rate monitor that features an innovative micro snap technology designed to provide comfort during workouts.
O'Reilly: Do you think they're confident about the accuracy of their heart rate monitor?
Lewis: I hope so.
O'Reilly: Word of warning.
Lewis: So, if you do the math, it's $440 if you buy them all individually, $400 to buy the whole suite. The UA Band retailing at $180 is pretty much well within the price points of most of what people who are expecting to pay for a fitness tracker. It's on the higher end, but it's not crazy. And I think in terms of functionality, you're going to see a lot of the same stuff with the UA Band. One of the things, in terms of battery life, I think UA Band was like five days, I think Fitbit's charge was seven to 10, that's what it's billed as. The thing I was most blown away with the UA Band was the charge time for a full charge -- 15 minutes.
O'Reilly: Wow! Really?
Lewis: Yes. And granted, this is what they're saying.
O'Reilly: That's almost Tesla good. They can do half a charge in 20 minutes, for a car. That's amazing.
Lewis: For five days' battery life? That's outrageous.
O'Reilly: Why don't we have this on our phones? Why? You see what I'm saying.
Lewis: Yeah. I would love to have that on my phone. I would not have to be tethered to my charger.
O'Reilly: Chris Hill, he's always charging his phone. Anyways. Very impressive.
Lewis: Yeah. So, you look at Under Armour coming to this market, I think it's troubling for Fitbit for two reasons. First off, I talked a little bit earlier about the class action lawsuit that Fitbit is facing. There aren't a lot of details out on it yet, but it's obviously not good for a product that is a fitness tracker.
O'Reilly: This is that competition that we all knew was coming.
Lewis: Yeah. It's competition we all knew was coming. Fitbit relies on wrist heart rate monitoring. What Under Armour is doing is having a strap that goes on your chest, closer to your heart. So, I don't know which one is more accurate. If I had to take a guess, I'd say probably chest monitoring, because it's closer to your heart. But, this is something new that's coming out, and it is directly addressing a problem that is perceived with Fitbit's products. So, it's troubling on that front. And then, like you said, it's a huge competitor, just hopping into the space. We saw the market share contraction that Fitbit experienced when Apple jumped in.
O'Reilly: What were you telling me? It went down ...
Lewis: I think Q3 2014, they had something like 32% of the wearable space. Q3 2015, I think it was like 22%.
O'Reilly: This is a one-third drop. This is not fun.
Lewis: So, the pie got bigger, and they wound up selling more units, but in their percentage of the overall market, they took a hit. And, something we talked about on that show, I think Vince subbed in when we did that IDC update, because you were out, but we were basically saying that wearables data is so lumpy, because new people keep coming in, so year-over-year comps are kind of weird. But I think you're just going to continue to see Fitbit get slower and slower and slower, and their market share is going to drop. So, it, again, gets into that, OK, are these two distinct categories that can survive? Are they able to be in the same market as these smart watch all-encompassing devices? Or are the fitness bands going to go the way of GPS devices, where the smartphone came in and totally supplanted them?
O'Reilly: Well, and you've got government trying to get in on that now.
Lewis: But I think the difference with Under Armour...
O'Reilly: They're an effective competitor. You said a "new competitor," I was, like, "They're an effective competitor."
Lewis: Which is exactly what Apple is, when they came into the market. You look at some of the other fitness band companies out there like Jawbone or Garmin, something like that. Those are specialty devices. They don't really have the brand name that somebody like Under Armour does when it comes to the fitness space. A lot of people, if they don't already have a fitness tracker and they're weighing the options out there on the market, chances are, they own something that is Under Armour apparel. Their apparel's awesome. I'm an Under Armour shareholder, and I also wear Under Armour.
O'Reilly: I wonder if and when Nike is going to get in on this. Have you heard anything?
Lewis: Yeah, they've been working on it, too. I think all the main athletic apparel retailers are getting in on it. But I think Under Armour has been really pushing the envelope in terms of tech integration with their apparel, and it's something that could pay huge dividends out of.
O'Reilly: Cool. Before we move on, I wanted to point our listeners to a newly redesigned focus.fool.com. There, you'll discover a special offer to join The Motley Fool's Stock Advisor newsletter for all Industry Focus listeners. All listeners have special access to a discount on Stock Advisor that works out to $129 for a full two-year subscription. Go to focus.fool.com to take advantage of that offer.
Lewis: So, first half of the show, pretty lengthy discussion of wearables and CES. But, that was not the only topic that was getting a lot of headlines this week. If I remember correctly, there was some pretty serious news about Netflix that came out a couple days ago.
O'Reilly: It was actually kind of a big deal. It was actually pretty impressive. I first got wind of this -- we've got two of our top-line analysts, Matthew Argersinger and ...
Lewis: David Kretzmann.
O'Reilly: Yes. David Kretzmann. I had a really good friend, I was like...
Lewis: I saw where your eyes were going.
O'Reilly: David, I'm sorry. I love you, man. And I watched the video and everything, and they just had witnessed Netflix founder and CEO Reed Hastings, give his keynote speech. And I was like, "Wow, they're really excited." You could just tell by their body language. And, despite the targets being late 2017 to be in just under 200 countries streaming for Netflix, they hit it already. They're in 190 countries.
Lewis: That's pretty close.
O'Reilly: There are 194 countries on planet Earth.
Lewis: Depending on...
O'Reilly: Yeah, Taiwan and all that; 190 billions of people could now theoretically get to Netflix.
Lewis: Wow. Are there any major markets in the account that are being omitted?
O'Reilly: ... China.
Lewis: Of course.
O'Reilly: 1.2B people cannot legally get Netflix in the People's Republic of China.
O'Reilly: I read that, I thought, wow, that's a really big market. We're actually jumping ahead in the notes here...
O'Reilly: It's fine. It doesn't matter. God knows, our listeners probably don't care. But there are 3.2B Internet users in the world. A bunch are in China or whatever. So, Netflix's achievable market is probably 2.5B, if they had a monopoly in streaming, or they got every Internet user to pay them $8 or $10 a month. So, that's kind of a big deal, because you know how many users they have now?
Lewis: I don't even think I could ballpark it.
Lewis: Really? That's it?
Lewis: Wow. I'm one of them. Did I tell you that I got my dad...
O'Reilly: Oh my gosh! You're not using your best friend's cousin's roommate's mild acquaintance's password?
Lewis: I was thinking about what to give my dad for Christmas, so...
O'Reilly: Give him the gift that keeps on giving, Netflix.
Lewis: Yes. And it's also a gift for me, because I set up an account for myself, too.
O'Reilly: Oh my God, Dylan ...
Lewis: Because I had to set it up for him. I put it on a smart TV, so I was like, "Hey, Dad, come in here and check this out, Merry Christmas." And then I turned it on and Netflix was there. And I was like, "By the way, I made an account for me, too." So, there's 60M + 1.
O'Reilly: Did you tell him to watch House of Cards? What'd you do?
Lewis: I gave him some recommendations. We'll see. I've been checking in on the John part of the account, and he hasn't really been watching much. There was this one show. It was a show I haven't watched yet. It was two older women. I think a Netflix original, I don't remember.
O'Reilly: Was it The Making of a Murderer?
Lewis: No, it was Gracie and something.
O'Reilly: What? Anyways, back to Netflix. They created hashtags, like #Neflix everywhere. It was a thing. Way ahead of schedule. The stock went up a bunch. Basically, the moral of the story, and what the thrust of the speech was, Netflix wants to be the world's TV channel.
Lewis: I buy it.
O'Reilly: I don't know. I think, how much I use it and my son uses it now to watch Daniel Tiger. It's a big deal.
Lewis: For them to be doing that, and to become a channel in their own right, that involves a lot of original content.
O'Reilly: That kept on coming, too. By the way, House of Cards is coming out in a month and a half.
Lewis: I can't wait.
O'Reilly: So excited! "America, I'm just getting started."
Lewis: That was pretty good.
O'Reilly: Thank you. If you didn't know, that was my Frank Underwood, poorly done impression. Anyways, in addition to all of this, Reed Hastings announced two series, which is what you were hinting at. The first was The Crown. It's going to be a British period drama, starring Claire Foy as Princess Elizabeth and Matt Smith from Doctor Who -- I don't know if you're a Doctor Who fan.
Lewis: I'm not, but there are many people around the office in HQ who are really into Doctor Who.
O'Reilly: Yeah. He's going to be playing Prince Philip. It's basically when she becomes queen and all this stuff, they show her trying on the crown and everything. I couldn't believe how long that preview was. I watched it and it was like four minutes. I was like, wow, really? The other one... this actually looks cool, too. It's a '70s period drama set place in the Bronx, and it's called The Get Down, starring Baz Luhrmann, and he's basically a disco club scene thing. It looks really cool. This is a big deal, because Netflix just keeps diving deeper into owning their own content, and the value for both of them and us, the viewer, is huge. I can't imagine not having House of Cards.
Lewis: What better way to make your platform super sticky than to have content you can only get there?
O'Reilly: Only on Netflix.
Lewis: Yeah. I mean...
O'Reilly: These things get buzz, and it's just game over.
Lewis: And the reality is, they've been spectacular. They've hit time and time again. Master of None, awesome Netflix original series. House of Cards. They just seem to keep striking out winners.
O'Reilly: You finished Master of None, right?
Lewis: I did, I watched it in like one weekend.
O'Reilly: Really quick, in one sentence, describe it for our listeners.
Lewis: It stars Aziz Ansari, the comedian, and it's basically him in his early 30s, maybe late 20s, in New York...
O'Reilly: Not quite growing up.
Lewis: Not quite growing up. But I think, a lot of millennial shows tend to get kind of whiny. This does a really good job of exploring things like race relations in the U.S., intergenerational relationships, how we treat our elders, gender differences, and the worlds that men and women live in, and how starkly different they are. So, it's something that you don't need to be in your 20s at a coffee shop watching, you can enjoy it at any age.
O'Reilly: Yeah, I'm on episode five.
Lewis: So, the big take away, I think come out with all this Netflix news, you quickly said it, the market was very happy with everything that came out.
O'Reilly: It went up 10% immediately, without question.
Lewis: This is, again, in a week where...
O'Reilly: The market was crashing, yeah.
Lewis: We had two 1%+ drops in major indexes. So, obviously, great news for investors. Investors are very happy, the market's very happy. It seems like, more than anything else, this was something that was expected, but that the rollout and implementation is going to be much faster than they originally thought.
O'Reilly: They did it two years ahead of schedule. I don't know how they pulled it off. So good for them.
Lewis: Yeah. Well, I think that's going to wrap it up for our tech show today. But if you're interested in getting a little bit more of our CES coverage and expanding the discussion here, the Fool has some more CES content available. We are compiling all of our CES headlines under one headline, "The Consumer Electronics Show (CES 2016 Roundup)" on fool.com, so if you just search that, you should be able to find it. And if you're looking for real-time coverage, the Fool's David Kretzmann is live tweeting his experience under the handle of @david_kretzmann. He's been really awesome with shots of panels, some teasers on interviews that he's conducting, and giving some really important quotes from some of the things he's been able to send in on.
O'Reilly: I suspect he's probably really using his phone charger while he's there.
Lewis: He's probably got one of those little back-up -- you know those bricks you can plug in? So, you can see everything the Fool's doing for CES. I'm sure next week, we'll probably do a wrap up.
O'Reilly: There's so much news. Cars came out, it was a big deal, but we only have 20 minutes.
Lewis: Yeah. And I know next week, on Wednesday's healthcare show, Kristine Harjes is going to be hosting David Kretzmann, and they're going to talk a little bit about the healthcare tech side of what he saw at CES. So, if you listen to all the shows, that's something to look forward to.
O'Reilly: That's it for us, folks. If you're a loyal listener and have questions or comments, we'd love to hear from you. Just email us at [email protected] As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Dylan Lewis, I am Sean O'Reilly. Thanks for listening and Fool on!