Late Friday, CNET reported that Nike had made the decision to turn away from wearable hardware:

Nike is gearing up to shutter its wearable-hardware efforts, and the sportswear company this week fired the majority of the team responsible for the development of its FuelBand fitness tracker, a person familiar with the matter told CNET.

Here’s why Nike did it:

Wearable tech is innovating faster outside of the company than it ever will inside the company. Wearable sensors are making exponential leaps every month and Nike could be benefiting from those advances, not competing with them. Make no mistake, wearable sensors are the future of fashion, but Nike is right to have kickstarted the market and to now take a step back to use their brand and checkbook to shape the growing industry rather than build their own stagnant version of it. In contrast, we see 3D Printing as a much more strategic play for the organization as an internal capability because of the technology’s maturity and potential impact across their production and distribution systems.

Only software can solve wearable fatigue. Wearable fatigue is a real thing. One research group found that “one-third of American consumers who have owned a wearable product stopped using it within six months.” These devices are only as useful as their network effects and feedback loops, which only software will offer.

With collaboration, NikeFuel forms the basis of an Activity Graph. Your Social Graph is who you know. Your Interest Graph is how you’re connected to them. Your Activity Graph will be what you do with them (and how your individual activity connects you to your friends). Fuel will become a currency (they’ve already experimented with it as an actual currency) but the real promise is how it can knit you to your friends. If Nike does it right, they’ll be happily forced to build a global social network around NikeFuel. (h/t to Jake Mitchell for coining the term ‘Activity Graph’)

The war for the wrist is a losing battle ground. As sensors continue to get smaller, they’ll become invisible and a part of everything around and on us – which means having one wrapped around your wrist will seem cumbersome when the fibers of your shirt can measure and relay your body temperature, sweat, and acceleration. It’s also important to put sales in perspective. The entire wearable market in 2013 was worth $330 million. Nike makes that much money from a single shoe release.

What Nike has to do:

Take software as seriously as footwear. The Fuelband was the first mass-market wearable. Nike entered the market and created the market in doing so. Yet they were slow to innovate on the device itself and quickly lost ground(and interest) to the competitors they helped create. This can’t be allowed to happen in software. To succeed, Nike has to adopt what we call a Responsive Operating System – our organizational theory of everything, developed over 7 years of studying a new breed of dominant businesses – because as an organization, Nike is not yet structured to adapt to the speed and scale with which software moves.

Adopting a Responsive OS will enable lean, cross functional teams to connect directly with their users, reducing latency and noise in the process. It will encourage decision making systems that value evidence, speed, and transparency – which will empower employees and lead to better decisions. If adopted, a Responsive OS will produce products that are truly built to evolve (imagine a sneaker subscription where the shoe fits better and works better with every new 3D printed pair). And critical to Nike’s software strategy, Responsive OS will foster an open software platform, not just internally, but designed for the world to build on and with.

While any organizational shift seems daunting at the outset, Responsive OS is in many ways a back to basics approach for a company that got its start with one athlete, one coach, and one waffle iron.