I’m not a huge fan of consumer wearables. In fact, I think most of them are kind of stupid, because they rarely have a unique use case and the redundancy drives me crazy. Like why do I need to wear something on my wrist to count my steps when my phone does that for me already and I take my phone everywhere? But then, all of my friends had Fitbits and things changed. Suddenly, there were multiple discussions on our group texts about who was winning the step count for the week and inside jokes about the struggle to always be moving (even in the bathroom). And, I’ll admit, I felt left out. So much so, that I am considering buying one.
The fact that Fitbit was (almost) able to convert me is a testament to the strength of their direct network effects, which is illustrated in the graph below by their exponential growth in two years from 1 million units sold in 2012 to over 10 million in 2014.
With 70% of the fitness wearable market, Fitbit grows stronger with every new user for two reasons. First, as aforementioned, more users translates to more new users via word of mouth recommendations and invitations to compete or reach goals together. This is extremely likely to happen with a product like Fitbit, where the density of users is important because people tend to compete with close friends and family. Second, more users provides Fitbit with more data. This data can be sold to other fitness brands to help them segment the market and sell their products. Data can also be used internally by Fitbit to create new and better products, which they have already begun to do by introducing a whole product line of devices to meet different needs.
Fitbit reinforces its direct network effects with indirect ones via an open API. Now, they can create as much value as possible with other existing fitness platforms. This is a great way to convert users, because switching costs are no longer an obstacle for them. The ease of integration makes Fitbit not only attractive in B2C markets, but B2B as well with entire companies signing up as clients for their employees.
It’s true that Fitbit will face competition from companies like Apple with more money to spend on R&D, but Fitbit’s market position and strong network effects will make it difficult for others to take the lead. As we learned, in an industry with strong network effects, such as this one, the only way to increase utility is to increase quality. Therefore, the best strategy a new entrant can take to beat Fitbit is to provide a more superior product. However, with the many years of data Fitbit has at its disposal as a first mover, it will be hard for a competitor to outmaneuver them.