Wearables – Out of fuel.

Nike’s hardware exit is ominous for those that remain.

• The exit of Nike from its FuelBand product shows how difficult hardware can be and that the real value is in the service and the data. .
• It looks very much as if Nike has laid-off the engineering team responsible for its FuelBand product meaning that the current product will be its last.
• Looking at the product in isolation seems likely that it has been a financial black hole.
• On top of the high development costs, the FuelBand has not proven to be particularly reliable meaning that warranty returns have also been significant.
• This, plus mediocre sales (partly due to its high price tag of $150), have probably meant swathes of red ink, driving management to look for another option.
• This is an ominous sign for the fledgling wearables industry as any product without a unique use case and rock solid reliability looks destined to fail.
• Furthermore the use cases that have emerged to date (smartphone remote control and activity tracking) can increasingly be carried out directly on the phone itself without an external sensor.
• Hence, without either of those two criteria in the bag, it looks like it is in Nike’s best interest to bail-out of hardware.
• However, that is not the end of the story as its close relationship with Apple could mean that Apple’s own M7 chip simply takes over the sensor function with the app doing the monitoring.
• This would mean that Nike activity tracking becomes officially exclusive to Apple devices.
• This could benefit both Apple and Nike as Apple would gain access to an exclusive service that would give it differentiation in the apps and services space while Nike would be out of the tricky hardware business.
• At the end of the day, I am not sure that Nike cares about the sales of the FuelBand as they have failed to move the needle of its $7bn revenue base.
• What it does care about is brand loyalty which is driven by users engaging with its app which will remain even as the hardware is phased out.
• If Apple can keep Nike exclusive, then its differentiation in the Digital Life services space will improve.
• If this differentiation can be spread right the way around the Digital Life pie, then margins could remain at supernormal levels indefinitely.
• Apple is very far from this goal but this would represent a first step.
• Nike would be cutting itself off from all of its customers who use Android or Windows Devices.
• However, looking at the premium position that it occupies in the sporting goods market, I suspect that the overlap of its customers with Apple’s is big enough for this not to be a real problem.
• This is a worrying sign for the likes of Jawbone, FITBIT Pebble and so on as the hardware is increasingly being integrated into the mobile phone giving users less and less reason to purchase extra devices.
• None of these devices meet both of the two criteria of unique use case and rock solid reliability making me pessimistic for all of them.
• Nike’s decision to exit early may indeed be a wise move.