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This story originally written by David Stern at CITEworld. Sign up for our free newsletter here.
It's nice to be right once in a while.
In December, I had the distinct pleasure of speaking on a panel at the Wearables Technology Expo, alongside Intel's Rob Rueckert and LumoBack's Monisha Perkash. When the moderator asked the panel for some closing thoughts on wearables, I said that if you were an entrepreneur developing activity tracking hardware for the wrist, you should immediately stop. Though unpopular at the time -- the comment elicited one or more "boos" from the audience -- my comments were grounded around three solid axes:
- Anyone wanting to compete with , Apple, or the hordes of Android-enabled devices to come would have to have $100 million annual marketing budgets.
- Any wrist-worn device needed to either win on fashion, or go far beyond common motion detection into accurately capturing deep biosignals to be differentiated enough to win on three fronts: consumer, health care, and venture capital
- Even if you had massive budgets and a differentiated product for the wrist, you had to be prepared to lose hundreds of millions of dollars annually to play in the space, and even a company like Nike might not be ready for this.
And so it was no surprise that on Friday Nike admitted that it might be getting out of the Fuelband business. (Or something like that.) Heck, I even predicted it again the day before it was announced. Blind squirrel, meet acorn!
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In my opinion, it's pretty simple math combined with a company cultural demand that killed the Fuelband.
To put some context around the math, although it doesn't break out its financials in this fashion, Nike probably sells $3 billion of athletic socks, with substantial profit margins, every year. SOCKS!
And although they also don't release these figures, if you extrapolate from Target and Best Buy's weekly sales data on overall wrist-worn device sales, my guess is that Nike's top line Fuelband revenue is no more than $150 million to $200 million. And that is just top line. On the bottom line -- you know, the one that counts with Wall Street -- this was a money pit.
Nobody takes back socks. They don't break. Their USB dongles don't lose contact points. Their firmware isn't faulty. And they don't fail when they get wet. Bottom line -- and I mean both actual bottom line and metaphorical bottom line -- this has been a major sinkhole for Nike, just as it will be for someone, foolishly, trying to do anything around the wrist without taking into consideration the warnings above.
But there is another less obvious reason why Fuelband might have been killed, one that is rooted deep within the bowels and history of Nike. Over the years, Nike has explored many products that have been discontinued, products that from the outside seem like they have a ton of tailwind behind them -- in-line skates, snow boards, helmets, hockey equipment, and cycling gear, to name a few. In fact, previous incarnations of the Fuelband were shut down a few times before.
Nike has always shown an incredible amount of financial discipline around these tough decisions. Nike isn't wired to sustain massive losses for profits on the come in areas that it doesn't and can't own as the dominant player, and clearly it wasn't going to own the wearables. So why does this happen beyond the bottom line math?
But that's only half the story.
The largest driving force behind these decisions is often that if Nike doesn't feel that it is truly able to create innovative products that can enhance authentic athletic performance, in a differentiated way, it gets out of the business. In such cases, Nike sometimes concludes that the most innovative approach is often to step back and look for more meaningful ways to add value.
The Fuelband, let's face it, was really a fashionable pedometer and watch whose greatest achievement was Kaizer Sozean. Nike essentially convinced consumers through a wonderful marketing concept called "Fuel," that precise accuracy was less important than directional accuracy. So if we're being honest, Fuelband was a fancy pedometer-plus-watch that required a tremendous amount of specific hardware, software, and firmware talent that traditionally hasn't fared well working within the Nike culture. It also had very little mass street appeal, which is worth another blog post entirely.
So where does Nike go from here?
If I were handicapping the company's next moves, here is what happens next -- though this is more of a "should" happen than firm prediction:
- Nike will grossly overpay for Strava (>$300M) because it can. Strava, combined with its massive running user base from Nike+ and other digital products aimed at runners, will create ownership of two of the most authentic communities from both sports and a unique crowdsourced data model.
- Nike will reenter cycling gear, a sport it really only entered previously because of Lance Armstrong, but whose global momentum is growing rapidly
- Nike will leave Strava CEO Mark Gainey and hopefully former CEO Michael Horvath alone, give them more responsibility over digital sport, and let them do what they do best.
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The article How Simple Math and a Nike Cultural Imperative Might Have Killed Fuelband originally appeared on Fool.com.
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