There has been a sea change within the wearables industry. In a remarkable turn of events, Apple looks to have grabbed the wearables unit sales crown from Fitbit this past holiday season. It's time to begin thinking about wearables not just as standalone devices for the wrist, but rather platforms containing a number of products designed for different parts of the body. In this environment, Apple has become the new wearables leader.

Change Is in the Air

Over the past few years, the wearables industry had come to revolve around two product categories targeting the wrist:

Health & fitness trackers

Smartwatches

Fitbit and Apple have been the top two companies selling wearables in volume. While Fitbit's assortment of health & fitness trackers outsold Apple Watch in terms of unit sales, the higher-priced Apple Watch gave Apple the revenue edge. After initially positioning Apple Watch as a mini iPhone on the wrist, Apple changed strategies last year in an effort to close the unit sales gap between Fitbit and Apple Watch. Management shifted Apple Watch marketing more towards health & fitness while lowering the entry-level price and expanding the product line to include more fitness-oriented Watches.

The ingredients for an interesting holiday quarter for the wearables industry seemed to be in place. The debate centered on whether or not Apple would be able to entice people to embrace smartwatches instead of dedicated health & fitness trackers. However, Fitbit had an early November surprise announcement. The company disclosed a sudden deterioration in customer demand in 3Q16, and the negative trends had continued into October. The slowdown caught Fitbit off guard. Management was forced to issue very weak financial guidance for the upcoming holiday shopping season. More worrying, management didn't seem to know what was driving the sudden decline in demand. While Apple Watch was a prime suspect, Fitbit has never publicly viewed Apple as a competitive threat.

Despite lowering sales expectations, Fitbit still ended up missing its holiday sales forecast. The company hit a brick wall in terms of sales growth. Demand for Fitbit products completely evaporated at the end of the year with the company seeing a 21% decline in unit sales in 4Q16. Just one year earlier, Fitbit had reported 55% unit sales growth.

While Fitbit saw weakening consumer demand, other wearables players reported much more positive results. Apple reported record Apple Watch sales in 4Q16. Fossil and Garmin also saw promising smartwatch trends. (My Fossil and Garmin 4Q16 earnings analysis is available here and here, respectively.) Garmin even described a scenario of robust smartwatch demand during the holidays. While consumers turned away from Fitbit health & fitness trackers during the second half of 2016, smartwatches have been gaining momentum.

By the Numbers

The shift in consumer preferences regarding fitness & health trackers and smartwatches is visible when comparing Fitbit and Apple Watch unit sales. As seen in Exhibit 1, Apple nearly closed the unit sales gap between Apple Watch and Fitbit last quarter. During 4Q16, Fitbit sold 6.5M devices at an average selling price of $85. Meanwhile, Apple sold 5.6M Apple Watches at an average selling price of $372.

Exhibit 1: Fitbit vs. Apple Watch Unit Sales