While Google would face an uphill fight if it tried to use Fitbit (FIT) to battle the Apple Watch head-on, there are some other ways that it could use Fitbit to strengthen its wearables and health efforts.
On Friday morning, Alphabet/Google (GOOGL) announced it had reached a deal to acquire Fitbit for $7.35 per share, or roughly $2.1 billion, after rumors of a deal surfaced earlier in the week. That price is more than 60% below Fitbit's $20 2015 IPO price.
Excluding Fitbit's $565 million cash balance, the deal has an enterprise value of close to $1.5 billion, or slightly over 1 times Fitbit's expected 2019 revenue. The deal is expected to close in 2020.
Naturally, given Fitbit's smartwatch efforts, much of the discussion about the buyout revolves around how buying Fitbit might help Google, which has developed a smartwatch operating system known as Wear OS that's used by third-party OEMs, better compete against the Apple Watch.
A Fibit/Google pairing just might have an opening in the smartwatch market with Android users, given that many Apple Watch features rely on iPhone pairing. However, there are still a few reasons to think that battling the Apple Watch would (to put it mildly) be challenging:
- While Apple's (AAPL) Watch sales have been growing at a strong double-digit clip, Fitbit's smartwatch business has been declining. Fitbit's smartwatch revenue fell 27% annually in Q2 and accounted for just 38% of its total revenue, down from 54% a year ago. Moreover, Fitbit blamed weaker-than-expected demand for its $160 Versa Lite smartwatch (it launched in March) for the full-year revenue guidance cut shared in its Q2 report.
- Fitbit's watches don't run on Wear OS, but a proprietary operating system known as FitbitOS. Should Google buy Fitbit and use the company to launch a line of Wear OS smartwatches, it wouldn't be able to leverage much of Fitbit's existing software work.
- Apple's chip and hardware engineering investments remain a major competitive advantage for the Watch when it comes to things such as form factor, battery life and health features. The large software ecosystem that now exists for the Watch, which recently gained the ability to run apps that don't need complementary iOS apps, is also a strength.
- As Rolex will gladly tell you, image and branding matter a lot in the watch industry. The Apple Watch simply has a cachet to it that, say, Samsung (SSNLF) and Fitbit watches don't.
With all this said, the non-smartwatch parts of Fitbit's business are currently in better shape. While its smartwatch sales tumbled, Fitbit's fitness tracker unit shipments and revenue rose 56% and 51% annually in Q2, respectively. This allowed Fitbit's total device shipments to rise 31% to 3.5 million, albeit while contributing to a 19% drop in its average selling price (ASP) to $86.
While the fitness tracker market never blew up the way that Fitbit investors were once hoping, there's still a subset of consumers who prefer using lightweight fitness trackers rather than smartwatches. And Fitbit seems to be doing a decent job of addressing their needs.
Fitbit is also seeing some traction for its Health Solutions business, which covers a slew of services that leverage Fitbit's hardware and are provided to businesses and healthcare firms. Health Solutions revenue grow 16% in Q2 to $24 million, and is forecast to total about $100 million in 2019.
Also, in late August, Fitbit launched a consumer health/fitness service known as Fitbit Premium that will sell for $9.99 per month or $79.99 per year.
There are a number of ways in which Google could use its existing software, services and digital health investments to bolster Fitbit's existing wearables and health services businesses. Possibilities include:
- Creating wearables that tightly integrate Google Assistant's services, with a focus on health and fitness voice commands and notifications.
- Integrating technology from Google's Project Jacquard and Project Soli within new wearables. Jacquard is an experimental initiative to bake touch-sensitive phone controls into objects that are worn or carried. Soli, which underpins the Motion Sense technology built into Google's new Pixel 4 phones, relies on radar to detect hand gestures and motion.
- Launching new health services that leverage the work of Alphabet's Verily life sciences unit, which has a number of digital health projects underway.
However, regardless of the possibilities opened up by a Google/Fitbit pairing, Google would have to execute better on a Fitbit acquisition that it has with some of its previous hardware acquisitions if it wants a deal to pay off.
Back in 2011, Google spent $12.5 billion to buy Motorola Mobility, with dreams of becoming a mobile hardware giant. But less than three years later, it ended up selling Motorola for just $2.9 billion to Lenovo.
Google also spent $3.2 billion in early 2014 to acquire smart thermostat and smoke detector maker Nest Labs, with the goal of putting Nest and co-founder Tony Fadell at the center of various hardware initiatives. However, Fadell left Google in 2016 following a rocky couple of years, and in 2018 Google decided to fold Nest into a hardware unit led by former Motorola exec Rick Osterloh.
To be fair, Google's hardware efforts to date also include some moderate successes, such as the Pixel phone line, and its Nest Home (formerly Google Home) smart speaker and display family. But these successes generally stem from organic investments rather than acquisitions.
To make its deal for Fitbit succeed, Google will have to do a better job of leveraging and augmenting an acquired company's technology and talent than it did with Motorola and Nest.
This article has been updated to note Fitbit's announcement that it has reached a deal to be acquired by Google.
