Witnessing the bare truth of the industry of activity trackers: the listing documents for Fitbit

 

As companies grow up and get ready to be listed on the stock market, they are required to reveal internal data to protect investors. In order to be listed in the U.S. stock market, one is required to submit a document called the S-1, and to meddlers like myself, the information contained within is, while insufficient, interesting and difficult to obtain otherwise.

Fitbit, which has attained a solid No. 1 position in the market for activity trackers, submitted its S-1 that was released by the U.S. stock commission (to view the original document, click here).

 

In fact, the listing of Fitbit in the stock market and its disclosure of the S-1 is a well-known fact, but media coverage of this issue deals mostly with the revenue, net profit, and sales of the company. As an aficionado of data, I was aware of the fact that careful examination of the S-1 could reveal more interesting information. I began to read the document that amounts to nearly 200 pages, but only managed to read a few pages due to a lack of time.

However, I came across the fact that Rock Health, well-known digital healthcare incubator, had already analyzed and presented the S-1 of Fitbit (the related link can be found here). Because the material is great, I would like to start with it and put my own analysis on it.

The key point of this document concerns an issue that those interested in wearables are most curious about, which is “how many users continue to be users.”

 

Before going over the document, I would like to show how the estimates were made in the first place through consumer surveys. The best known survey result comes from a report called Inside Wearables, which was presented by Endeavour Partners, a consulting firm (the original link is here).

According to the data, which was presented by the rather provocative title, ‘Dirty little secret of Wearables,’ one-third of activity meter users cease to use the product in 6 months. This company has been conducting consumer surveys every year, and the result is as follows:

Abandonment rates

Figure 1. Abandonment rates

This content will be included in the new report that is soon to be made public, and you can see that the user dropout rate increased by a significant amount after 2013. This result content is not limited to Fitbit but is constantly used when dealing with the engagement issue of wearable devices.

 

Now, let us move on to the Rock Health analysis.

I will only deal with the parts related to engagement issue, but the original article containing other material that may be interesting to the viewer depending on his or her viewpoint, so I recommend that those who are very interested in wearables read the original document at least once.

Fitbit users

Figure 2. Fitbit users

I have redrawn the figure from the analysis by Rock Health using the S-1 data (the unit is in millions).

Regarding the number of users, the S-1 reveals three important pieces of information. These are the total number of devices sold, the total number of registered users and the total number of paid active users (PAUs).

The concept of PAUs was developed as a marker for those who actively use the device. Instead of Monthly Active Users (MAU), which is frequently used in the app industry, Fitbit has set forth, in a sense, a marker of its own.

The definition of PAU is a person who has satisfied at least one of the following criteria over the past three months.

  1. Someone who has held an active account of Fitbit premium or Fitstar.
  2. Someone who synchronized a meter or weight scale to the Fitbit account
  3. Someone who measured over 100 steps of activity or weight

What do you think? Do these criteria sufficiently define someone who actively uses Fitbit? For now, I will just move on to the next part.

 

What is remarkable from the figure above is the proportion of PAUs out of the total number of registered users. In 2014, this number was 46%; in 2015, it is approximately 50%. Aside from how accurate the definition of PAUs is, since approximately 50% are actively using Fitbit, could I say that Fitbit’s engagement is better than expected?

However, upon careful examination of the figure, you can see that the number of Fitbit users has recently increased by a significant amount. This is good for corporate performance, but from the perspective of PAUs, this means that the number of recent subscribers far exceeds that of past subscribers. Given the fact that those who have held a subscription for a longer period of time are more likely to terminate their usage, the percentage above falls short of accurately reflecting the actual proportion of active users.

 

The clever analyst of Rock Health was also aware of this point and decided to further refine the data.

Devices sold, change in PAUs from previous year, decrease in PAUs

Figure 3. Devices sold, change in PAUs from previous year, decrease in PAUs

If the previous was cumulative data, this figure is organized by incidence per year or per quarter (the unit is in millions.) For each period, three types of data are given, and the one to the far left is the total number of devices sold. For example, 10,900,000 devices were sold throughout the year of 2014. The red bar in the middle represents the change in PAUs from the previous year to the given year. For instance, at the end of 2014, compared to the end of 2013, the number of PAUs increased by 4,100,000 people.

Isn’t something a bit off?

10,900,000 more devices were sold but the number of PAUs increased by only 4,100,000. This makes sense if each user purchased 2 or 3 devices of Fitbit. However, in the first figure that was shown (figure 2), if you compare the cumulative number of devices sold and the total number of users registered, there is not much of a difference. Thus, this means that Fitbit users have not purchased multiple devices (we will discuss this later in more detail.)

If so, throughout the course of a year, 10,800,000-4,100,000=6,800,000 people have stopped using Fitbit. This is the number shown in the far right in Figure 3.

Furthermore, if you return to the figure shown at the very top (figure 2), the number of Fitbit PAUs at the end of 2013 is 2,600,000. If we make the most conservative assumption by claiming that all of these users dropped out during 2014, those who purchased Fitbit in 2014 who did not become PAUs or became dropouts amount to 6,800,000 – 2,600,000 = 4,200,000 people. Certainly, there must be those who purchased Fitbit prior to 2013 who continued to be users, so this is an extreme assumption.

As the definition of PAUs is based on activity over the course of 3 months, those who purchased Fitbit in the 4th quarter of 2014 cannot be included here. Thus, in the 4,200,000 people calculated above, only those who purchased Fitbit in the first 3 quarters of 2014 are included. Since the number of purchasers for the first 3 quarters of 2014 was not otherwise given, if we conduct a simple calculation by multiplying the number of purchasers during the year of 2014, which was 10,900,000, by 3/4, we obtain 8,180,000 people. Furthermore, if we assume that the number of purchasers in the 4th quarter of 2014 is the same as the number of purchasers in the 1st quarter of 2015, this results in to 10,900,000-3,900,000=7,000,000 people. Since the number of Fitbit purchasers is rapidly increasing, we can assume that approximately 7,000,000~8,000,000 people have purchased it. Of this number, if the previously calculated 4,200,000 people have dropped out, we may conclude that approximately 53-60% have stopped using Fitbit.

However, since we assumed that all who purchased Fitbit before 2013 have ceased to be users, the proportion of users who terminated their service in 2014 must be higher than this. In the analysis by Rock Health, it is shown that over 70% of users terminated their usage (it seems that Rock Health estimated the number of users in the first three quarters of 2014 based on Fitbit earnings per quarter). More people than expected are ceasing to use activity meters in a shorter period of time.

 

Also, we cannot overlook the fact that the definition of PAUs is very broad. From the point of view of healthcare, it is important to encourage the users to continue to use the device, but from a business point of view, if you can continue to sell as many devices as possible, user termination may not be a very significant consideration (I certainly believe that it is).

In order for Fitbit to continue to produce meaningful results, the generation of novel markets and repeated sales to its established customer base are both important. For a product whose consumer usage decreases by a significant amount within a year, both are not easy to achieve.

 

Now I would like to deal with the problem of making repeated sales to preexisting consumers.

Even without considering the data, ㅛㅐㅕ can imagine that there are not many people who will repeatedly purchase activity trackers like Fitbit. This is because it is highly unlikely that the sensor will be improved dramatically or a function beyond one’s imagination will be included. I will calculate a parameter based on the Fitbit S-1 data that will help us better visualize this.

If you divide the cumulative number of devices sold by the total number of registered users, the following is obtained.

 

2012 2013 2014 2015 1Q
Cumulative number of devices sold (in millions) 1.3 5.8 16.7 20.6
Total number of registered users (in millions) 1.1 4.5 14.6 19
Cumulative number of devices sold / total number of registered users 118% 129% 114% 108%

 

If you just consider the recent data, the average number of devices purchased per user is 1.08. Rock Health claims that this number is actually 1.09, but this seems to be derived from data that includes the number of devices sold prior to 2012. In my calculation, this data was omitted.

A phenomenon like purchasing a new smartphone every 2 years is not observed for Fitbit. Of course, we need to wait and see because the product has only recently been launched and the number of users has recently undergone a rapid increase. However, given the nature of the product, it will be of interest to see to which extent repeated sales of the product are possible.

 

There may still be limits to the data from Rock Health as it is based on PAUs, a concept developed by Fitbit.

In relation to this, another piece of data was reported. Recently, a certain media outlet mentioned the content of the Fitbit S-1. It claimed that it is difficult to estimate the extent of the continued user base of Fitbit simply based on the content of the document, and alluded to data from an outside company called Evidation Health (the link can be found here).

 

Evidation Health operates an activity information platform that enables users of over 100 fitness apps and devices to synchronize their personal activity information and provides points that can be converted to cash or prizes for those who have managed to maintain healthy lifestyles.

 

According to officials at Evidation Health, the company has managed the data of 20,000 Fitbit users since the latter half of 2010, and Fitbit users are actually very highly engaged and “those who purchased Fitbit tend to be very attached to their devices.”

Based on the data from this company, if we apply the definition of Paid Active Users from the S-1 of Fitbit, approximately half of PAUs have updated their activity information in 70 out 90 days. In addition, 5% of Fitbit users terminate their usage within a week of purchase, and 12.5% terminate their usage within one month of purchase.

 

If we define active users as those who have updated their activity information in 70 out of 90 days in accordance with the definition from the analysis by Evidation Health (this number is approximately half of PAIs), the dropout rate of Fitbit users increases dramatically. Based on this, I will reconstruct the second figure from above (figure 3). The number of PAUs was halved for the modification.

Devices sold, change in PAUs from previous year, decrease in PAUs , modified version

Devices sold, change in PAUs from previous year, decrease in PAUs , modified version

 

The method of calculation is as follows.

The number of active users at the end of 2013 was 13,000,000, and if we assume that all of these users ceased to use Fitbit, the number of dropouts in the first three quarters of 2014 is 75,000,000. Given the fact that the number of new users in the first three quarters of 2014 was 7,000,000~8,000,000, nearly all of them have chosen to terminate their usage. Since the data from 20,000 users was applied to the data from the entire company, there is certainly a gap between this calculation and reality, but the results are nonetheless surprising.

More surprising is the comment from Evidation Health that Fitbit users are more active compared to users of other devices. Aside from the data from Evidation Health, even by looking at the internal data from Fitbit, we can see that the user dropout rate is quite high. If so, then how much higher is the dropout rate for Jawbone or Misfit?

 

If Fitbit is listed, more data will be revealed via conference calls or corporate inquiries. Through the disclosure of such data, I hope that we will be able to gain better insight into the workings of the activity meter industry. The future of the activity meter industry is becoming the object of even greater curiosity.

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