With fitness trackers becoming more and more of a commodity item, it is no surprise that Fitbit would be looking to expand their business. The most logical space for the company to move towards is smartwatches, after all, a smartwatch is basically a souped up, more connected activity tracker. While the company has tested the market with two devices that straddle the line between a smartwatch and fitness tracker (the Surge and Blaze), they are too much of an in-between device. Despite costing as much as a smartwatch, they are both overly sporty looking and lack the level of connectivity needed to really function as a smartwatch. A smartwatch needs an intelligent and informative OS that has app-like functionality. Instead of venturing into the smartwatch world alone, it looks like Fitbit will acquire Pebble, producers of the Kickstarter funded e-paper smartwatches.
Pebble is actually a smart target for Fitbit. Despite massive initial success, Pebble has been plagued by rumors of financial turmoil over the 18 months. The company was one of the first smartwatch makers. Their original name-sake smartwatch launched in July 2013 (after setting Kickstarter records in 2012). This was almost a year before the first Android Wear device and almost 2 years before the Apple Watch. Pebble owned the market. With the pending launch of the Apple Watch in 2015, Pebble returned to Kickstarter to fund a new version of their signature watch, Pebble Time, featuring a reimagined OS and a new color e-paper screen. The result was the most successful Kickstarter to date, earning $20 million. The problem is $20 million sounds great but in reality, that doesn’t equal a lot of devices. We did the math back when the fundraising campaign concluded and the $20 million equated to just under 98,000 units. A discount-priced launch for an existing company should result in a huge surge of sales, but the 98k is so far below Android Wear’s “disappointing” first year sales of 720k units that it is tough to imagine Pebble was able to get even close to that in 12 months. A few months after the launch of the Pebble Time rumors began to swirl about financial woes at Pebble. The company was looking for $10 million of VC money but could not find anyone interested. According to reports, Pebble was forced to take a bank loan “in order to stay afloat.” In September the company tried to drum up business with a softer looking round version of the Pebble Time and then this May returned to Kickstarter to fund a version of the Pebble and Pebble Time with a heart rate sensor and a new iPod-shuffle like device featuring GPS, WiFi / 3G, and Spotify integration. While the company raised $12 million through this most recent campaign, that pales in comparison to the $20 million raised a year earlier. Besides the decline in interest, the latest Kickstarter also raised concerns about why an established wearable company would continue to utilize the crowdfunding site.
While this downward curve might not sound great, it places Pebble in an ideal position for Fitbit. First, despite raising over $43 million via Kickstarter alone, analysts estimate that Pebble is only worth $34 – $40 million today. This is a good financial fit for Fitbit, whose current market cap (after a very rough year) is $1.8 billion. Second, Pebble has a loyal, if small, user base. Provided that current users aren’t put off by their “indie” tech company being sold, Fitbit will instantly bring in thousands of passionate customers. Third, Pebble has a ton of experience, knowledge, and existing assets in the smartwatch space. The smartwatch ecosystem is so complex, entering the market this late with zero know-how with UI design, watch apps, and advanced connectivity for multiple platforms is a serious issue. There is a reason so many new entrants license Android Wear. If Fitbit were to try to go at it alone, it would likely take over a year to bring anything to market. Instead, by purchasing Pebble, Fitbit will be able to go-to-market- day one.
While Pebble had a commanding lead in the smartwatch market, they were never able to capitalize on it. Perhaps it was lack of innovation, the fact that the devices didn’t appear cutting edge, or that other devices provided tighter integration with people’s phones. The reality is Pebble has been in the weeds for a long time. Fitbit acquiring Pebble has the potential to not only boost Fitbit’s place in the market but also improve on Pebble’s legacy by making their IPs more relevant and exciting for consumers.
But let’s get down to brass tacks. Fitbit’s massive drop in valuation has finally driven home to the company’s execs what we have been talking about for almost 2 years – fitness trackers are a commodity business. If Fitbit wants to survive to see 2018, they need to start transitioning to a segment of the wearable market driven by innovation. Innovation, whether software or hardware, protects a company from a race to the bottom. Fitbit is behind the eight ball and at this point needs to acquire a company to make their move fast enough. Pebble is an ideal choice. It is priced appropriately and comes with a smartwatch operating system and (perhaps more importantly) an ecosystem of existing 3rd party apps. It will be interesting to see if the acquisition of Pebble can improve Fitbit’s bottom line and result in better Pebble OS based smartwatches or if we are looking at another HP/Palm WebOS failure.