The wearables war between Apple (NASDAQ:AAPL) and Fitbit (NYSE:FIT) has gotten a little more interesting with the former's recent earnings report, which generally fell below analysts expectations and rekindled questions about the success of Apple's newest product. Nevertheless, no one is prepared to count out the world's most successful technology company. Investors continue trying to figure out which horse to back in the wearables race. I'm not prepared to call it for either one, yet, but I do think that a lot of investors are being ill-served by the debate right now.
A lot of Apple advocates are still essentially riding off the rep of Steve Jobs, calling Apple the company that you can count on to bring revolution to a sector. In fact, Apple is now truly Tim Cook's company. It is actually Fitbit which is doing things the old Jobs way, while Apple has decided to try something new. Whether investors decide to back the new Apple methods or the old ones, they should not mistake one for the other.
One of the things that always strikes me about the non-smartwatch Fitbit devices - I have a Charge HR myself - when I look at them is how much they remind me of the original iPod. Not so much the look or design as the philosophy that seems to underlie them. Like the iPod, they are not built to be mini computers or even mini smartphones. Rather, they are built to do one job better than any other device on the market. In this, they embody the Steve Jobs philosophy, that many investors are counting on, better than the company whose stock they are probably buying.
Because most of our iPods now come bundled into our iPhones, we have come to associate the whole Apple brand with power. Powerful processors, powerful screens, powerful everything. But it wasn't always so. When iPod first launched it was a device with a single LED screen that had no third party apps and supported no other entertainment than music. To solve the problem of finding songs quickly, Steve Jobs did not put a super powerful chip into the device that could process search commands, which would have raised the price astronomically. Rather, he built the track wheel into the face of the iPod. Jobs official biographer, Walter Isaacson, noted that Jobs repeatedly pushed the design team to make sure that any command he wanted to execute on the iPod could be accomplished in three clicks or less. This was largely done not by making the device more powerful but by making it simpler and even less powerful, by moving many functions that were too processing-intensive for the iPod to the computer the device would sync with.
It's very different today, of course. Today the iPod is all but extinct, eclipsed by the iPhone, which with its 64-bit architecture and five-inch-plus screen has become less of a phone and more of a mini-computer. The Apple Watch, in turn, often feels almost like a miniaturized iPhone. Its screen is about the size of an iPod's but rather than one function almost two dozen apps have been added. The Fitbits, meanwhile, like the iPod, have only one button and can only display one of a few possible items at a time as you cycle through them. All the more complicated things that come with owning a Fitbit - tracking calories eaten and burned, setting goals, sharing, inputting weights and exercises - are offloaded to the app or to the computer, just like other music functions like making playlists and ripping songs were once offloaded from the iPod to the Mac.
Fitbit also meets Jobs' high standards for aesthetics, at least as much as the Apple Watch does. Especially its latest iteration, the Alta, whose reviews regularly encompass words like "sleek" and "stylish." And customers certainly appreciate it, with Fitbit reporting brand loyalty numbers that are almost getting up into Apple range. About the only area where Fitbit breaks with the original iPod is the price. But I'm not sure Jobs would disapprove even of this.
When iPod first launched for $399 in 2001, many joked that the name stood for "Idiots Price Our Devices." The laughs didn't last long, as Apple went on to sell hundreds of millions. And Jobs never admitted he might have overpriced it, at least publicly. When he launched the iPhone six years later he went up to $499. But the original iPhone sold "only" six million units, and when Jobs asked people why they bought something else more than half of them said it was too expensive.
That was what led Apple to cut a new deal with AT&T extending its exclusivity in exchange for a subsidy that lowered the price for the customer at the point of sale to $199. While iPhone 2G sold only six million units in five quarters, iPhone 3G sold over 14 million in three quarters. Jobs had not pulled that $199 number out of thin air. Apple had already seen something similar with the iPod, whose market share went from 31% to 74% when its price was cut to $249 and then $199. Jobs and his marketing chief Phil Schiller would later refer to $199 as "the magic price."
Fitbit takes this lesson to heart. With the exception of its Surge flagship, which was $249, everything it has ever launched has been below the magic price, including its new $199 Blaze smartwatch, the new flagship presumably. The cheaper non-smartwatch Fitbits are even less.
But Fitbit is not a commoditized bottom feeder. Its "cheap" devices carry considerable margins for the company, up near 50%, which it reinvests into extensive R&D to improve both its hardware and its proprietary software. Again, just like Steve Jobs and Apple.
Tim Cook's Brave New World
But while Fitbit is almost aping Steve Jobs, Apple largely seems to have moved on from him. Tim Cook's Apple has crossed most of Jobs' redlines by now. The list includes larger-screened iPhones, an enterprise iPad Pro, massive share buybacks and dividends, replacing Jobs' beloved skeumorphism with Ive's almost Google-like flat surfaces, and more.
Apple Watch kills another Jobs idea. It abandons the "magic price" rule. It was priced first at $349 and now at $299. Since Apple does not report Watch sales separately we do not know if the cut is from lack of sales or from improving economies. Perhaps a bit of both, though the latest Watch sales estimates are rather positive. But Apple is still not at the magic price with its new watch.
Before the Apple bulls jump all over me, this is not another Watch hit piece. I'm saying that Tim Cook does things very differently than Steve Jobs would have, but that is not always a bad thing. Cook has delivered regularly growing profits and a steady hand at the wheel, despite having some impossibly huge shoes to fill. "Not Steve Jobs" should not be the only thing people see when they look at him. He has also, now, delivered Apple's first new product category since the iPad.
The Apple Watch has been called everything from a breakthrough to a flop. That last, at least, is not correct. Regardless of whether it meets the high standards we have come to associate with Apple, the Watch has become the first real challenger to Fitbit's market leader position. It brings Apple's unparalleled ecosystem right to your wrist, and like all Apple products it is both pleasing to look at and more profitable than its competitors.
When designing a new and - hopefully - revolutionary new product, should one aim for versatility and power, or simplicity and focus? Cook and Jobs seem to have different answers to that question. How each investor answers it will determine whether they should invest in Fitbit or Apple. But they shouldn't assume Apple's answer is the same as it was 10 years ago. Apple has completely changed its position since Steve Jobs' death.
What I would say to investors in either company is - don't judge a book by its cover. If you do pick Apple over Fitbit in the wearables sector, do so because you believe that a more powerful, smartphone-like wearable with greater processing power, a rich ecosystem and more versatile controls are what people want. Not because it happens to be the device that says "Apple" on it. If its Apple's reputation, its history of revolution, its "it just works" mojo that you are banking on, it may interest you to realize that Fitbit actually looks a lot more like the old Apple than Apple does these days. So if you think people want simpler but less versatile devices that "just work," maybe that's where your money belongs.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.