CASE 07

Rochelle R. Brunson Marlene M. Reed

Baplor Universit¡j Ba¡jlor Universit¡J

itbit revolutionized the personal fitness activ- TechCrunch50 Conference drumming up preorders

F ity in 2009 with the inWoduction of its Tracker

wearable activity monitor. By 2016 the com-
pany was a hit in the marketplace with Fitbit devices
for their product. Neither man had any manufactur-
ing experience, so they traveled to Asia and sought
out suppliers and a company to produce the device
becoming nearly ubiquitous with fitness enthusi- for them.
asts and health-conscious individuals wearing the Fitbit put its product named ‘Tracker” on the
devices and checking them throughout the day. The market at the end of 2009, and the company shipped
company’s sales of activity monitors bad increased approximately 5,000 unita at that time. They had
from 5,000 units that year to 21.4 million connected additional orders for 2,000 units on the books.
bealth and fitness devices by year-end 2015. The The product Park and Friedman developed was
company executed a successful IPO (initial public called an “activity monitor” which was a wireless-
offering) in 2015 that boosted liquidity by $4.1 billion enabled wearable technology device (see Exhibit 1).
and recorded revenues of $l.86 billion by the con- The purpose of the Fitbit was to measure personal
clusion of its first year as a public company. Fitbit’s
chief managers expected .2016 revenues in the range EXHIBIT 1 Fitbit Ultra
of $2.4 to $2.5 billion. However, on the last day
of February 2016 the price of Fitbit stock plunged
nearly 20 percent after the company announced that
the sales and earnings in the first quarter would fall
short of analysts’ forecasts. The missed forecasted
milestone created a dilemma for founders James
Park and Hric Friedman, who were now faced with
finding a strategy to turn things .around at the now
publicly traded company.

BACKGROUND ON FITBIT
Fitbit was founded in October 20D7 by James Park
(CEO) and Eric Friedman (CTO). The two men
started the company after noticing the potential for
using censors in small wearable devices to track
üidividuals’ physicaJ activities. Before they had a Soune: Fttfi ÿ Inc. wehsna.
prototype, Park and Fríedman took a circuit board in
a wooden box around to venture capitalists to raise & Copyright Rochelle R. Brunsmi and Marlene M. Reed.
money. In 2008, Parà and Friedman addressed the
 CASE O7 Fltbit, 1nc.: Has the Co mpany Outgrown Its Strategy? C-&7

data sucb as number of steps walked, heart rate, qual- consumer to have an overview of physical activity,
ity of sleep, and steps climbed. The device could be track goals, keep food logs, and interact with friends.
clipped to one’s clothing and worn all the time=— The use of the website was free for the consumer.
even when the wearer was asleep. Included with the Thereafter, the company developed a number
Tracker was a wireless base station that could receive of devices utilizing the Tracker technology. These
data from the Tracker and charge its battery. The devices are shown in Exhibit 2. Some of the later
base station uploaded data to the Fitbit website when devices located tbe sensor technology in a watch that
connected to a computer. This feature allowed the could be worn on the wrist (see Exhibit 3).

EXHIBIT 2 Activity Tracker Devices Developed by Fitbit

Fitbit Tracker J0O8

Fitbit ÜItra

Ëltbît.Ariä Wí-FI srnärt.sćälée

Rëüogńižed tisers.wëärirlğ':Fitöit:trackers
'Meásurèd weiğht; body’rnass i'üdex. :äriô pefcenÎagë of body:îat
Morë vivid’ dițşitaI’.dišplăy
.Šèpârat'ë «IÏp/.:äricI.ćhärğlrig cab.Të
Wì're1éss.sync dcińglè:
Used Bluețooth 4.O
Šizč' of ä ğtiärtér
Trackèd *stëğs:taken,.distancé.trãveled,.ahd calöries bürned
Ïn«lüded:a disposable: battery
Lower pûce than other.,'titbits
Worn ört tfie wrÏšt
Trackèd movement.2 Ï his..a.Òay. ińcłüõing šleëp patterńs

Reğlacernent:för Fitbit Forcë.

WrisÏb.ärid:dišplãyed”..čãilër.”ID
Fitbit Süïgë .SİțfijIâr:to ä.srnaît watüh OFbëLZğ74
Mönitorëd.hèärt'rätë.
Träčked ğac'e;.distãńcë,.:ärîcI:ël4vatlorł usinjş GPS
Fitbit Blazë. -ginii¡är.tö a::üíÎłart.watFch
Focused'.od lïtñloss..first.
ColörëcI”tciiz¢îÏscfeeri”
ExchangüabJü.štÎağ.artd frărne
Source: Fltblt, Inc. website.
 PART 2 Cases in Crafting arid Executing Stratégy

EXHIBïT 3 Fitbit Watch However, another study undertaken by Sasaki

ct al. in 2015 and reported in the Journal oJ Physi-
cal Activity anJ ffenf#i found that the Fitbit wire-
less activity tmcker wom on the hip systematically
underestimated the activity eneigy expended.
These researchers suggested that the Fitbit manage-
ment should consider refining the energy expendi-
ture prediction algorithm to correct this consistent
underestimation of activity in order to maximize the
physical activity benefits for weight management
and other health-related concerns.

t°tISSION OF FITBIT
According to Fitbit, ‘the mission of Fitbit is to
empower and inspire you to live a healthier, more
fiource.- Fltblt, Inc. webshe. active life. We design products and experiences that
fit seamlessly into your life so that you can achieve
your health and fitness goals, whatever they may be.’^
On May 17, 2015, Fitbit fded for an IPO with
the Securities and Exchange Commission with an
NYSE (New York Stock Exchange) listing. The THE ACTIVITY TRACKING
IPO brought in $4.1 billion. The stock was initially
priccd at $20 but sborÜy tbereafter the sbBzes were
INDUSTRY
trading for $35. By the end of February 2016 the There are a number of companies that would be
shares had fallen to $14. considered competitors of Fitbit in the activity
A study in 2015 by Diaz et al., published in tracking—companies such as Garmin (oiiginaUy
the Internstional Journal of C‹irdiology, investi- producing GPS equipment for cars) and Under
gated the Fitbit to see how reliable the device was, Armour (originaI)y producing undeigarments for
and wbether it could be used to monitor patients’ men). There aie also companies such as Apply who
physical activity between clinic visits. The research produce smart matches that perform many of the
indicated that the Fitbit One and Fitbit Flex reliably same tasks as Fitbit’s devices.
estimated step counts and energy expenditure during Another company entering the market late was
walking and running. These researchers also found Jawbone. This company was formed in 1999, and its
that the hip-based Fittiit outperformed the Fitbit consumer devises were Bluetooth headphones and
watch.' speakers initially and later fitness trackers. Witb the
Another study in 2015 by Cadmus-Bertram et increased competition in the activity tmcking indus-
a1., published in the American Journal of Preven- try in 2015, Jawbone dropped to seventh place in the
tative ñfodiciw, had essentially the same outcome second quarter from fifth place in the first quarter
as the Diaz study. Their study examined the Fitbit among makers of wearable tracking devices.
Tracker and website as a low-touch physical activ- Xiaomi, a Chinese company, shipped 12 million
ity intervention. They were attempting to evaluate wearable activity trackers in 2015. Töat gave tbe
the feasibility of integmting the Fitt›it Tracker and company a 15.5 pement global market share wbich
website into a physical activity intervention for post- was second to Fitbit with Apple, Garinin, and Sam-
menopausal wooden. Their conclusions were that the sung behind the two leaders. In 2014, Xiaomi had
Fitbit was well accepted in their sample of women shipped 1.1 million units and garneied only 4 perœnt
and was associated with increased physical activity of the world market share.
at 16 weeks. In other words, merely wearing the Pit- Tàe presence of Apple in the maiàet had been
bit seemed to heighten the amount of physical exer- almost as noteworthy as Xiaomi’s. The Apple watch
cise in which the women engaged 2 was first marketed in 2015, and in that year its
 CASE O7 Fitbit. Inc.: Has the Company Outgrown Its Strategy?

market share went to 14.9 percent. This was in spite Design Flaw
of the fact that Apple’s product was priced much
The Fitbit Ultra had a permanently curved shape
higher than either Fitbit or Xiaomi.
that allowed it to be clipped onto a piece of cloth-
For many years, neuroscientists bad only the
ing. However, the plastic in the unit could not handle
electroencepbalograin, or EEG, to detect signals
the strain at the looped end and would continually
that carried different stages of sleep or brain power
break. When this occurred, Fitbit offered the con-
surges brought about by seizures. This was a very
sumer replacement or repair of the unit.
cumbersome process. Then, in 2007, Dr. Philip Low
in San Diego invented the Sleep Parametric EEG
Automated Recognition System (SPEARS) g go- Allérgic Reactions
rithm. This invention allowed physicians the ability From the beginning of the company, Fitbit was
to create a cluster map of brain activity with infor- plagued by problems. When Fitbit added Fitt›it Flex
mation that was gleaned from one electrode. This and Fitbit Force to its list of products, the company
advancement caught the attention of Tan Le, CEO of began receiving complaints that the watchband was
Emotiv (a company .that manufactured EEG rigs for irritating the skin of coiisumers. The irritation was
consumers). Le believes weamble activity devices discovered to be caused by allergic reactions to
may be the appropriate venue for this new medical nickel, and tbe products were mcatled in early 2014.
breakthrough. This would open up far-reaching new As many as 9,0fD customers were reportedly affected,
uses for weamble activity tracking devices. and the Force was replaced by a new model named
As more devices enter the market, Fitbit’s domi- Fitbit Charge which was believed to be allergen free.
nance in the present market diminishes. However, Unfortunately, customers continued to complain
additional uses of the Fitbit tracker could boost its about allergic reactions to the new device as well.
share again (see Exhibit 4).
Too Much Information
PROBLEMS FOR FITBIT One of the greatest strengths of Fitbit from the
very beginning was its website. By utilizing Blue-
Antenna tooth technology, information from the Fitbit could
There were early problems with the design of Fit- be uploaded to the web in order .to tmck energy
bit. For one thing, the antenna did not work properly. expended and compare one’s performance with
In regard to the antenna problems, CEO James Park other Fitbit users. However, the company discovered
said, “In my hotel room I was thinking this is it. We in 2011 that users who recorded their seiual activity
litemlly took a piece of foam and put it on the circuit (time spent, not activity) were sharing their informa-
board to fix an antenna problem.’* tion with the world unknowingly. Therefore, Fitbit

EXHIBIT J Top Five Wearables Vendors by Shipments, f•1arket Share,

and Year-over-Year Growth 2o zq—zo ›s (units in millions)

78.5%

TéMf 2B8

Source: tOC lMxfduAfe Quarterly N/éorob/e. Devfce Tracker February 23, 2D16.
C-70 PART 2 Cases in Crafting arid Executing StratÓgy

realized that sharing all of a customer’s information very large manufacturing costs. In addition, Fitbit’s
with the world was not a good idea, and the com- full-year researcb and development budget included
pany changed the website so that information posted the company’s Digital Health strategy.'
by the users was private by default.
FINANCIAL PERFORMANCE
Privacy Issues
On February 22, 2016, Fitòit reported revenue of
U.S. Senator ‘Chuck” Schumer declared in August $1.86 billion, düuted net income per share of $0.75,
2014 tbat Fitbit was a *privacy nightmare." He fur- and adjusted EBITDA (earnings before interest, taxes,
ther stated that users’ movements and health data depreciation, and amortization) of $389.9 million-
were being tracked by the com and sold to third see Exhibit S. The company’s balance sheets for 2014
parties without their Schumer asked and 2015 are presented in Exhibit 6.’
that the U.S. Federal Trade Commission undertake Fuß-year 2015 Financial Highlights were shown
the regulation of fitness trackers. In response to this in the filing as follows:
charge, Fitbit suggested that it did not sell data to
thìrd parties and would be glad to have the oppor- • Sold 21 4 million connected health and fitness
tunity to work with Senator Schumer on this issue. devices.
• FY 15 revenue increased 149 percent year-over-
Cost of Launching New Products yeør, adjusted EBITDA increased 104 percent
In Fitbit’s Form 8-K filing on February 22, 2016, • U.S. comprised 74 percent of FY15 revenue;
the company warned .that the costs .that were related Europe, Middle East, and Africa, 11 percent;
to two new products would negatively affect theìr Asian Pacific, 10 percent; Americas, excluding
first quarter earnings in 2016. They further stated the United States, 5 percent.
that researcb and development would hurt operating • Cash, cash equivalents, and marketable securi-
margins in 2016. The two new products that Fitbit ties totaled $664.5 million at Dœember 31, 2015,
suggested it would launch in 2016 were Fitbit Blaze compared to $195.6 million at December 31,
and Fitbit Alpha, and these two products would incur 2014, and $573.5 million at September 30, 2015.

EXHİBIT 5 Fitbit’s Consolidated Statements of Operations, 2O1ą—row s

(in thousands)

.Reveńuë.
C ›șt afrevenuet

General áńd ädmiñistrativø 33ĘȘ6

Change İń cantlngent..coíłsiderätiÖn
Tata} operating + xpenses 1 72B
:Operatirłg‹i›ncofne.
i :io texœ•se›..n•t
Other:expense; nei
In:œme bgfpre.jûc.a.me taxes
Ińcome tax..èxğense’.
"Ńët ïrłcÕme.

fiource.- U.S. Securłtles arld Exchange Commission, Form &K, Rtblt, Inc. for fÏscal 2ŒS.
 CASE O7 Fitbit, Inc.: Has th e Co mpany Outgrown Its Strategy? C-71

EXHIBIT 6 Condensed Consolidated Balance Sheets, 2O1p—ao1s

20fi0 2044

Assets
Current assets
Cash and cash equivalents $ Ei3g,846 $ 195,626
Marketable securities I 28,632
Accounts receivable, net 469,200 23B,8' 9
Inventories 17B,146 I 1g,072
Prepaid expenses & other current assets 43,530 13,6 14
Total current assets 1.35g,414 g63,17 1
Property and equipment. net 44,501 26,435
Goodwill 22,157
Intangible assets, net 12,2 16
Deferred tax assets 83,020 02,001
Other assets I.7E8 1,444
Total assets $ 1 ,Ei1 9,066 $633,051
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders’ Equity
Current liabilities
Fitbit Fofce recall reserve $ g,122 $ 22,476
Accounts payable 260,842 195,666
Accrued liabTTities I 94,977 70,940
Deferred revenue 44,448 9,009
Income taxes payable Z,868 30,631
Long-term debt, current portion 132,5B9
Total current liabilities 5O8,Z57 46 1,3 1 1
Redeemable converâble preferred stock
Warrant liability 15,797
Other liabilities 29,358 12,867
Total liabilities E 37,615 489,975
Redeemable convertible preferred stock 67,8 14
Stockholders' equity
Common stock & paid-in capital 737,84 1 7,98Z
Accumulated other comprehensive income 691 z7
Retained earnings 242,9 19 67,242
Total stockholders’ equity 98 I.4g1 7g,262
Total ITab1l\tles and stockholders’ equity $1.Ei 19,066 $633,0g1

Source: U.S. Secur1tles and Exchange Commission. Fltblt, Inc. 205 Form 8-K.

Fitbit announced in the filing that it expected geographic territories. In addition, the company
full-year 2016 revenue to be in lhe range of $2.4 stated that it expected gross margins to range from
to $2.5 billion which would be driven by the intro- 48.5 to 49.0 percent. Fitbit also expected adjusted
duction of new products and expansion into new EBITDA to range from $400 to $480 million.
C-72 PART 2 Cases in Crafting and Executing Stratégy

ANALYSTS’ ASSESSME.NTS the target price to buy tbe stock from $33 to $18.
These analysts suggest that the company’s new
Afier the 20 pement drop in the price of Fitbit stock products are unproven, so they don’t know how
tate in February 2016, a number of Wäll Street ana- much they will add to sales. 2
lysts gave their assessments of future movements
of the company’s stock. An analyst with Global
Equities Research, Trip Chowdry, suggested that
DECISION TIME
be believed .the stock could fal) another 50 pement. James Park and Eric Friedman were facing a deci-
He speculated, “Gradually the market for single- sion about a strategy to improve the analysts’
purpose devices (fitness tracker) is heading toward assessments of Fitbit. One comment that many
zero, and there is nothing FIT can do to reverse the people had made about Fitbit was that it needed
trend.”" In addition, Chowdry commented that to be more than a one-product company. Since the
unlike Apple, Inc., Fitbit dœsn’t have a group of activity tracking feature was being used in many
developers or a way of generating income as the App other devices by a variety of companies, Fitbit had
Store dœs. Even though the Fitbit tracker products to think of new uses of the tracker as well as new
were much cheaper than Apple’s ($129 as com- devices. As one journalist suggested, “Stand-alone
pared to $349 for the cheapest Apple Watcb Sport), fitness trackers are iPod in a world that’s moving to
Apple had an inventory of more products than Fitbit. iPhones.”'
Activity Wacking is just a feature used by Fitbit, and After all, Park had recently commented, “The
this feature was being used in many otber devices by next big leap will come when we tie into more
a variety of companies. detailed clinical research and create devices that can
Pacific Coast analysts downgraded the compa- make lightweight medical diagnoses. You look at
ny’s stock to seKtor weight from overweight beKause blood glucose meters today, I wouldn’t necessarily
of expected weakness in sales in the coming year, say that those are the most attractive or consumer
and the limitation it has in differentiating its pmd- friendly devices. I would say consumer focused
ucts. The Pacific Coast analysts suggested, “We do companies, whether it’s us or Apple, probably have
not expect any incremental)y competitive product an inherent advantage in the future. ' 4 One possi-
announcements from Apple in the next year, but bility for the company was to become a platform—
we have to assume those will come at some point in rather than just a product. That would entail moving
2017 or 2018.”'' Therefore, .thèse analysts believe into niche markets witb devices that are designed for
Apple romains a serions threat to Fitbit in the future. very specific and unique purposes. Some of the pos-
Leerink analysts downgraded Fitöit’s stock to sibilities would be moving furtber into health care
market perform from outperform and also reduced and corporate health care. "

EhIDN’OTES

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