Apple & Fitness Subscriptions
Will Apple consolidate a fragmented category?
Apple’s Health Kick
Yesterday, Bloomberg reported that Apple would soon enter the digital fitness market with its own subscription service. Describing the offering, Bloomberg writes:
The company is also developing a new subscription for virtual fitness classes that can be used via an app for the iPhone, iPad and Apple TV, the people said. That service will be offered in a higher-end bundle with the rest of Apple’s services. Codenamed “Seymour,” the workout package would rival virtual classes offered by companies including Peloton Interactive Inc. and Nike Inc., according to the people.
Apple’s entry into the digital fitness market should not surprise us. Over the past few years, the company’s investments in hardware and software have emphasized fitness and wellness use cases. On the hardware side, the Apple Watch and Air Pods have enabled us to shed our phones on runs, hikes, and intensive cardiovascular work. And on the software side, Apple’s Health application has become a hub for tracking physical activity, vitals, and sleep.
Collectively, this investment reflects what CEO Tim Cook has described as Apple’s greatest potential for impact. Speaking with CNBC in early 2019, Cook noted:
“We are taking what has been with the institution and empowering the individual to manage their health. And we’re just at the front end of this,” he said. “But I do think, looking back, in the future, you will answer that question: Apple’s most important contribution to mankind has been in health.”
So what can we expect from Apple’s entry into the digital fitness market?
Apple’s Advantages
To evaluate Apple’s entry into the digital fitness market, we must first define the category in which the company’s new offering will compete. Based on early descriptions, Apple’s offering falls within the digital aggregator category, a category defined by its large number of providers and, ergo, intense competition.
In an earlier piece, I explained the challenges inherent to this category:
In combination, market competition and weak retention prevent digital aggregators from exploiting their structural cost advantages. And as long as this segment remains competitive—with significant fragmentation, low barriers to entry, and high customer churn—incumbents will struggle to capture outsized profits.
For Apple, these market challenges present an opportunity.
The company can leverage its strategic advantages to directly benefit its fitness offering in the market. Specifically, the company can lean on the power of defaults and its capital advantage to drive customer adoption and reduce long-term competition.
Power of Defaults: Apple’s control over the iOS ecosystem means that its fitness offering can quickly gain distribution on millions of devices. Unlike competitors such as Peloton or ClassPass, which must spend millions to get customers to install their applications, Apple can simply include its new offering in a regular software update.
Capital Advantages: Given its size, Apple only needs to spend nominal dollars—in relative terms—to effectively compete against other digital fitness services. This nominal spend, which translates to an absolute financial advantage, means that Apple can effectively outspend standalone digital offerings pursuing either rollup or scale strategies. Further, Apple’s ability to operate its service at a loss indefinitely could reduce competition—and increase future profits—by both forcing competitors to fold and reducing new market entry.
Assuming that Apple enters the market, what can we expect?
Apple’s Entry
Expect Apple to take a page from its premium video playbook to consolidate the fragmented digital fitness market.
With premium video, the company first launched a pre-installed video app ("TV") that aggregated third-party video services. Years later, after gaining distribution on millions of devices and building user habits, Apple used this distribution channel to successfully launch Apple TV+, its proprietary video service. What is more, because Apple owned the distribution channel—the TV app was pre-installed on millions of iOS devices—the company could favor its Apple TV+ offering with prominent in-app placement.
This premium video playbook can easily be applied to digital fitness, a fragmented market with no clear market leader. Apple could start by aggregating third-party fitness applications such as Peloton and Class Pass in a new, wholly-owned application. And, when Apple is prepared to launch its own service, the company can simply leverage this existing distribution point to drive adoption and sign-ups for its proprietary service.
In sum, we have seen the Apple playbook before. The only question: will Apple run it again?