What the deal means for the wearable market and beyond
Earlier last week, Reuters reported that Google parent company Alphabet was in negotiation to buy wearable maker Fitbit, and by Friday, news broke that Alphabet had reached a deal to buy the fitness tracker company for roughly $2.1 billion. While that seems like a big number, it is but a sliver of Alphabet’s $121 billion cash flow. Upon the announcement on Friday, Fitbit shares rose more than 15% to $7.14, while Alphabet’s shares ticked up 1.08%, which equates to a whopping $9 billion increase in market cap.
At first glance, Alphabet’s decision to buy Fitbit could be seen as a bid to help Google better compete against Apple in the wearable market. While that may very well be the short-term objectives, taking a deeper look reveals that buying Fitbit points to Google’s long-term vision around growing related fitness and health services, expanding Google Assistant integrations, and building out its ecosystem for ambient computing.
A Renewed Bid for the Wearable Market
Buying Fitbit, a stable second-place holder in the U.S. wearable market led by Apple, has an immediate impact on Google’s wearable product line, which currently runs on the Android Wear OS. The value of North America’s wearable market reached $2 billion in Q2 2019, with shipments up 38% at 7.7 million units, according to data from Canalys. More than 60% of Apple’s 4.7 million global Watch shipments were in North America, where it took nearly 38% market share. Fitbit placed second, with a 24.1% market share, largely thanks to its continued push of low-cost fitness bands, while Samsung’s wearable products, which runs on its own Tizen OS, captured 10.6% market share. Android Wear products, in contrast, lags behind these three market leaders significantly, due to its modularized approach.
As an emerging hardware category, wearables benefit from a full stack integration of hardware and software to ensure the user experience is top-notch. This is the approach taken by the aforementioned three leaders in the wearable market today. Buying Fitbit would allow Google to follow the same approach as it marries Fitbit’s demonstrated capability in building low-cost wearable bands, which have been embraced by over 27 million active users, with its software expertise. This software would piggyback on Google’s existing consumer products and cloud services to create a better wearable product where Google controls both the hardware design and the software layer. In addition, buying Fitbit allows Google to leverage Fitbit’s well-known brand and established retail distribution to increase the reach of its future wearable products.
Buying Fitbit allows Google to leverage Fitbit’s well-known brand and established retail distribution to increase the reach of its future wearable products
As the smartphones reach a plateau in key global markets, major tech players are starting to look beyond mobile devices to capture consumers. For Apple, the rising sales of Apple Watch, AirPods, and related services are becoming an increasingly important driver of its business. Notably, Apple’s wearables revenue could surpass that of iPad and Mac combined as soon as late next year. For Google, a bigger push into the wearable market will help it better establish its key services on devices beyond mobile and future-proof its business.
Although Apple currently enjoys a considerable lead in the market, there’s still a lot of room for growth, particularly on the lower-end market, that Google could capture through Fitbit. Apple Watch, as much as it has become a standalone product, will always work best with an iPhone and stay deeply entrenched in Apple’s ecosystem. It is important that, despite its outsized influence on market innovations, iPhone remains a small player in most of the global markets compared to Android phones. At the moment, smartwatches remain a product for early adopters with disposable income, which typically overlaps with Apple’s core customers. In the long run, however, as Android users, especially those in the mid-tier market, start to consider purchasing wearable products, Google needs to ensure it has a competitive product in place to prevent deflections to Apple.
A Boost to Google’s Healthcare Ambitions
At the end of the day, however, the hardware is usually just a means to an end for Google, and that endgame is always about data. The most important benefit that Google will gain from capturing part of the growing wearable market is to ensure it will have an unobstructed channel of data collection. Specifically speaking, establishing itself as a player in the wearable market will help Google gain access to valuable personal data around fitness activities and, in the future, biometric data.
Establishing itself as a player in the wearable market will help Google gain access to valuable personal data around fitness activities and, in the future, biometric data.
At the moment, wearables are heavily marketed on the merits of their fitness and healthcare-related use cases. As the global leader in the wearable market today, Apple Watch has been doubling down on growing healthcare features as a key selling point after its initial rollout. Last year, it added an FDA-approved ECG feature that helps users monitor their heart activities and alert them to potential atrial fibrillation and other heart conditions. Apple has partnered with healthcare institutions and researchers to leverage the data collected through Apple Watch for medical research or clinical trials. It also enables care providers to integrate health records through Apple Health to make it easier for patients to access their medical data alongside their health data generated by Apple Watch.
Fitbit, in contrast, is mostly positioned around fitness rather than healthcare, as evidenced by the recently-unveiled Fitbit Premium subscription service for personalized fitness coaching. While theoretically fitness services could ladder up to health-oriented features, there are significant challenges Google will need to address in practice. Its relatively lower pricing and longer battery life, two of Fitbit’s main selling points, are predicated on running a stripped down OS on underpowered processors. Meanwhile Apple is simply way ahead of its competitors in designing small, power-efficient processors for wearable devices. Even with added expertise on hardware product design from the Fitbit team, Google would be unlikely to compete with Apple Watch on the same level without significant investment in their wearable chip design.
That being said, there are still plenty of benefits for Google to capture the lower-end of the wearable market. Having a significant share in wearables would help it collect more granular personal data on activities, locations, and biometrical responses. However, given the highly sensitive nature of this kind of data, Google wouldn’t — and shouldn’t — be able to funnel it back into its advertising machine for ad targeting in the short-term. Nevertheless, having access to this data would be crucial for Google to develop personalized services that are informed by this data and the lifestyle insight they produce.
Google wouldn’t — and shouldn’t — be able to funnel it back into its advertising machine for ad targeting in the short-term
It is also worth noting that beyond Google, Alphabet has other subsidiaries in the healthcare and bioscience domains, including Verily, which focuses on applying data science to healthcare solutions, and Calico, which focuses on anti-aging and longevity research, that could benefit greatly from the data that buying Fitbit could bring. In addition, Alphabet’s growing ambition in healthcare extends to more than 150 patents in life sciences and countless collaborations with pharma companies. Most recently, Alphabet invested $375 million in digital health insurance provider Oscar and partnered with French drugmaker Sanofi, who will use Google’s machine learning capabilities and cloud data solutions for research and innovation projects. Owning a piece of wearable market will be imperative to boosting the chances of success for these health-related endeavors.
An Expanding “Made by Google” Ecosystem
Looking at the big picture, buying Fitbit and making a renewed effort to capture the wearable market will also help Google better establish an ecosystem of Google services, delivered through a variety of “made by Google” products. During its latest hardware launch event last month, Google highlighted its vision for building a future of “ambient computing” where Google’s services, led by Google Assistant, is accessible throughout various contexts — whether it be at home, at work, or in the car — in a consistent and personalized manner. To make that vision a reality, wearables would play a big role in filling out some of those in-between spaces that are currently filled by mobile. In addition, Fitbit’s engineering team, and the patents they hold, could also help Google develop better products in other wearable categories as well, such as wireless earphones, which will further extend the reach and accessibility of Google Assistant as well as Google Pay.
Wearables would play a big role in filling out some of those in-between spaces that are currently filled by mobile
As public sentiment towards big tech continues to deteriorate, Google faces increasing regulatory threats to its core search and advertising business. Buying Fitbit and expanding its ecosystem would allow the company to further diversify its portfolio and transition towards a more service-oriented company, thus preemptively addressing the growing “tech-lash” and potential antitrust moves. Compared to Facebook, Google has been better at framing its data collection as a means to improve its customer services and returning value back to users through personalization and predictive analytics. Building out an ambient computing ecosystem would make Google services even more useful and convenient, which, in turn, furthers its justifications for its data-driven business model. Make no mistake, the existing data that Google will get from Fitbit is unlikely to contribute to the bottom line of its massive ad business for fear of consumer blowback, especially in the current climate, and risk damaging the brand trust that Fitbit has cultivated. However, Google could leverage that data to develop a more robust ecosystem to lock in users and come up with more effective means to leverage that valuable data.
Lastly, buying Fitbit also provides Google with a competitive advantage against Facebook and Amazon. Reportedly, Facebook also made a bid for Fitbit but could not match Alphabet’s offer. Wearables are not a great channel for transitional forms of advertising, and lacking an existing wearable business, Facebook would be less likely to integrate Fitbit’s assets to boost its bottom line as well as Google would. And, considering some of the newer Fitbit products actually support Alexa, this acquisition also means that Amazon will lose access to an important user base and miss out on having a wearable presence, a valuable piece of its “Alexa everywhere” mission. Even if Google fumbles in fully capitalizing the potential this Fitbit acquisition brings, undermining two of its main competitors in advertising and ambient computing would still prove to be well worth the $2.1 billion.
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