With wearable fitness devices the fastest-growing sector of consumer electronics, Fitbit, Inc. (FIT-NYSE) and Jawbone are engaged in a life-or-death marketplace and legal war.
Number two fitness device maker Jawbone filed an antitrust claim in San Francisco’s U.S. District Court, in response to a patent lawsuit filed by number one maker Fitbit, Inc.. Jawbone accused Fitbit of trying to poach up to 300 of its employees in an alleged scheme to steal 18,000 confidential Jawbone digital files as “part of its by-any-means-necessary campaign to impede competitors and preserve its dominant position in the fitness-tracker market,” according to the Wall Street Journal.
On Nov. 2, Fitbit denied Jawbone’s allegations as a “misguided attempt for publicity to deflect attention from Jawbone’s own lack of performance,” and filed a complaint asking the International Trade Commission to halt imports of Jawbone’s products for patent infringement, then announced second quarter sales that tripled in revenue on 4.8 million devices.
Most analysts had predicted that Fitbit’s sales would decline for the September quarter as consumers save for Christmas. But the company sold 600,000 more devices than the prior quarter, booked $80 million more revenue than analysts predicted, and just raised its full-year guidance for sales by $250 million to $1.8 billion.
Fitbit, Inc. stock did fall back by 9 percent after the company announced it would sell 21 million shares in a secondary offering that will nearly double its current float of only eight million shares.
Earlier this year, the Consumer Electronics Association revealed in its 17th Annual Ownership and Market Potential Study that the fastest growing market penetration was wearable devices. Led by fitness trackers, the penetration doubled to 11 percent of U.S. households, and was expected to double again in the next 12 months.
Despite all the hype associated with last year’s introduction of the Apple Watch, Piper Jaffray’s latest semi-annual “Women’s Survey” suggests increasing interest in fitness wearables, with 18 percent of women already owning one, 19 percent intending to purchase a fitness wearable in the next six months, and 32 percent of women saying they are already using a fitness app. Fitbit’s 68 percent “mindshare” made it the most preferred fitness band, while the company’s fitness app achieved the No. 2 spot for popularity, and its smartwatch achieved the No. 3 spot.
This competitive disadvantage for Jawbone is especially challenging after the company mortgaged its current and future licenses, intellectual property, royalties, accounts receivable, and revenue from IP and licenses to BlackRock for a $300 million loan to meet defaulted vendor payments, according to Fortune. Existing venture capital investors Andreessen Horowitz and Silver Lake Partners appear to have passed on investing more into equity.
Jawbone is now on its fourth stand-alone lawsuit against Fitbit, which has been trying to get to trial on the merits of its patent infringement suit against Jawbone for over a year. But given that Jawbone mortgaged away virtually all its assets, if Fitbit wins its patent suit there may be no Jawbone assets to attach.
Engadget describes Jawbone’s legal strategy as a “plan to sue Fitbit into oblivion” in hopes of “pressuring Fitbit into settling a case it might otherwise try to fight in court.”
Fitbit went public in June, raising $793.5 million at a stunning valuation of $4.1 billion in the largest initial public offering (IPO) by any consumer electronics company in history.
Jawbone has been private for 16 years and is incorporated as AliphCom, Inc.