Future of Fitness (Part 1)
It is no secret that technology and COVID-19 have transformed industries and created new consumer trends. As part of the early stage investing team at KB Partners, a firm that invests across the intersection of sports of technology, I have a front row seat to changes in the Health & Wellness space as consumers have adjusted to the new realities of life during a pandemic.
The Global Wellness Institute has valued the global wellness economy at $4.5 trillion in 2018, with the physical activity economy part of the industry is expected to surpass $1.1 trillion by 2023.[1] In the US, fitness is a $34 billion industry, and an estimated 66 million[2] Americans have a membership to a fitness club. Well…. had. Stay-at-home orders since March 2020 forced gyms to either shut down or pivot into a virtual product for at-home fitness. Storied names like Gold Gym, Flywheel, 24 Hour Fitness, and NY Sports Clubs filed bankruptcy. On the other hand, companies that specialized in on-demand, home-fitness with a compelling competitive advantage gained meaningful traction. In 2020, Peloton’s stock increased 406%. The sudden positive demand shock for online fitness has created a plethora of business models that might not have gained user traction and investor capital if it were not for the pandemic. Yet doubt remains — will at-home fitness be the new normal? A recent survey suggests it will — the study showed that 75% of all consumers say they’ve switched to exercising more at home during COVID-19 and that 66% of all consumer prefer home fitness over the gym. In other words, 43–50 million[3] people have started making home fitness a new default for health and wellness. In part one of this essay, I would like to highlight four fitness-tech business models that attracted investor capital during the pandemic. In part two of this essay, I would like to highlight trends in smart wearables I’m excited about.
Fit tech business model #1: Fitness gamified
US video game usage increased 75% during the pandemic. Many would say it is the ideal entertainment as people comply with stay-at home orders. In addition, social stigma around gamers has also changed. Today, gaming is ubiquitous, with 77% of people aged 15–69 playing video games. The activity is viewed as not only an individual past time but also a social activity. Gaming companies like Roblox, which recently filed a $1bn IPO, have become an alternative place for teenagers to hang out with friends. Building on the popularity and high market penetration of gaming, companies have seized the market opportunity. Omni Arena — an omnidirectional treadmill simulator for virtual reality games — raised a $10M seed round in October 2020, and Quell.tech — a virtual fitness service that uses service bands to get fit while fighting their way through a virtual fitness world — raised an $3.88M in October 2020. They seek to make exercise exciting by offering an experience that integrates gaming with fitness.
Takeaway: I think at-home digital fitness gaming products that seek to make exercising exciting appeal to potentially two sets of consumers:
1) Fitness-first, gaming-second consumer: Physically inactive individuals who are open to exercising more regularly but find it difficult to be motivated to exercise.
2) Gaming-first, fitness-second consumer: Adventurous gamers who are open to trying out new video games.
I think the fitness gaming product will appeal more to the fitness-first, gaming-second consumer. About 80% of U.S. adults and children aren’t getting enough exercise for optimal health. For those who don’t like to exercise, fitness gaming products can be perceived as a gateway product to fitness. On the other hand, I think consumers who exercise somewhat regularly would prefer to attend a real boxing class as it offers a fuller boxing experience. For adventurous gamers, the health benefit of gaming is not the primary factor that affects purchasing decisions. It will be tough for fitness gaming companies to succeed against traditional video games whose offering aligns with a physically inactive activity that gamers often seek in their gaming experience. To succeed it will be important for new players in this space to ensure consumers care about the differentiation their fitness gaming products, as compared to other traditional fitness solutions. It is also important to embed a social community aspect as a piece of their offerings, a key tool to combat retention challenge.
Fit tech business model #2: Airbnb for Fitness — Two-Sided Fitness Platforms Connecting Trainers and Users
Many of the 373,700 fitness instructors in the US fled to Zoom Live and Instagram as gyms shut down. Of those, a significant proportion are not influencers with a built-in social media following that could monetize from ads. Building on the rise of the creator economy and out-of-work fitness trainers, Salut — who provides a Twitch-like platform for fitness professionals to offer classes to app users — raised $1.25M pre-seed in November 2020. Currently the Company’s service is free for trainers while users are encouraged but not enforced to tip. Signs of early traction include consumers willing to pay $5 — $10 per hour[5], which is pretty good when compared to other non-fitness content categories. By way of comparison, Netflix’s user revenue per hour is $0.14[6]. A fitness platform like Salut, Moxie raised an initial round of $2.1M in July 2020. Unlike Salut, Moxie has begun charging fitness instructors on the platform a subscription fee and lets the trainers set their own price, which is typically $0 — $15 per hour. A creator platform focused on fitness, Playbook makes it easy for fitness/wellness creators to curate exercise/diet content for and engage with consumers who also become part of the platform’s social community. The platform raised $12.3M seed and Series A in September and October 2020 and has achieved good traction since, gathering high user ratings on the app store and landing celebrity fitness trainers such as Magnus Lygdback on the creator side.
Takeaway: A platform business model can be powerful due to the accretive network effects that help the business gain a majority market share once it passes critical mass, which is when the value to new users of participating in the platform exceeds the cost of participation.[7] Amazon, Facebook, Tinder, and Twitter are examples of platform business models that passed critical mass. However, early customer acquisition is especially tough for new two-sided platforms businesses and new free two-sided platforms like Salut typically face a chicken-and-egg problem. Thus far, Salut and Moxie have focused efforts to attract one side of the platform to organically incentivize the other side to join. Utilizing this approach, Salut has attracted an initial group of 55 instructors. [8]
While I like that ‘Airbnb for fitness’ business model provides a monetization channel for trainers — with incumbents such as Peloton and now Apple Fitness that offer a wide range of fitness experiences at a high quality and affordable price — new startups in the space are faced with high substitutes in a largely crowded market, which is a significant headwind to scale.
Fit tech business model #3: Masterclass for [Insert Sport]
Socially distant sports such as golf and tennis experienced a boom during Covid-19. The shipment of adult tennis racquets increased 43% during the pandemic. TopCourt — an online instruction and storytelling platform that offer tennis super fans tips and life insights from top professional tennis players such as Venus Williams and The Bryan Brothers — capitalized on this surge and raised $1.25M in June 2020. Similarly, Skills, an online learning platform teaching athletic skills from the likes Michael Phelps and Maria Sharapova, raised an inaugural $5M in October 2020.
Takeaway: Masterclass for [insert sport] business models are more of an educational entertainment platform (e.g. Masterclass) than it is a fitness tool (e.g. cycling classes on Peloton). Masterclass’ traction thus far hinges on the celebrity of category leaders from a diverse array of industries teaching a broad set of culturally relevant topics, thus appealing to a broad set of audience. I think mimicking that strategy to the sports industry will likely result in different growth trajectory due to a smaller addressable market. I think the challenge of being an ‘edu-tainment’ platform that depends more on the celebrity of pro athletes featured than socially relevant content offered is to be one without 1) negatively affecting customer lifetime value and 2) attracting cheaper substitutes.
The value proposition of Masterclass is both the celebrity of individuals featured and culturally relevant self-help content offered. People have much more idiosyncratic attitudes in choosing their favorite athletes than they do when focusing on areas of self-improvement. Would a subscriber that has already watched from her one or two favorite athletes cancel subscription once she has binged all their videos over a couple months? Would a consumer rather go on Youtube and watch a Michael Phelps interview for free instead of paying to watch him Skills?
Fit tech business model #4: AI-first Personal Coach
With Peloton’s meteoric rise and Apple entering the fitness space, players in fitness tech need to find a way to sustainably differentiate their product. One way to establish a point of difference from incumbents is to offer a personalized experience enabled by AI technologies through mediums of computer vision, smart apparel, and SMS. Recent acquisitions such as that of Onyx, an AI body movement tracker, by CureFit, a $575M online fitness platform, and Mirror by Lululemon show that incumbents are aware of how crowded the space is and are seeking ways to be differentiate themselves. By their nature, at-home workouts lack in-person personal coaching element however this can be ameliorated by AI. The AI comes in a variety of interfaces that range from connected apparel to SMS. Asensei is real-time movement coaching platform that utilizes sensor/smart apparel and AI to provide a user with the individual attention of a personal trainer. Verb is an AI SMS system that provides accountability for consumers to achieve their health and wellness goals.
Takeaway: With nearly 50,000 health fitness apps available to consumers, Fitness tech has become a largely crowded space. To survive and thrive, health & wellness companies need to ask how to be a signal in the noise. AI-first fitness platforms that can scale personalized private coaching to large numbers of people are attractive acquisition targets and partners for fitness incumbents and active lifestyle retail brands. Differentiation ideas for a sustainable competitive advantage range from offering premium quality, to being a low-cost provider, to specializing on a sport as opposed to general fitness. Greater long term defensibility is more likely to come from business models that are iPad/Mobile-first and video-enabled that exhibit early signals of high retention. As AI-first fitness coaching applications increase, I wonder will AI-coaching be the future commoditized technology? If so, something else will need to take over as differentiation factor. The community and social aspects of an app that drive meaningful virality and user retention will likely be new differentiation factors.
Thank you to Marcel Wolff and Lance Dietz for contributing insights and reviewing drafts of this post.
[1] https://globalwellnessinstitute.org/press-room/statistics-and-facts/
[2] Based on 330M US population as per US Census Bureau multiplied by an estimated 20% of Americans according to IHRSA that have a fitness club membership.
[3] Calculation: 66% — 75% * estimated 66M US fitness goers = ~43M — ~50M
[4] The Digital Health Revolution by Kevin Pereau.
[5] https://techcrunch.com/2020/11/30/salut-raises-1-25m-for-its-virtual-fitness-service/
[6] N. America NFLX ARPU $13.4 (Statista) / 30 days = $0.45 Avg daily rev per user. $0.45 / 3.2 avg hours of NFLX user per day = $0.14.
[7] Modern Monopolies: What It Takes to Dominate the 21st Century Economy by Alex Mozed & Nicholas L. Johnson.
[8] https://techcrunch.com/2020/11/30/salut-raises-1-25m-for-its-virtual-fitness-service/
*Funding information sourced from Pitchbook.
