Hardware is increasingly becoming a commodity, where devices with nearly identical features end up competing mainly on price.
But for big consumer technology companies like Apple and Google, it’s still important to have a foothold in the wearable devices market because it’s the key way to get information about users on the go, as well as to gather potentially lucrative biometric data about the human body.
Apple, with its health-tracking smartwatch, is dominating the market, especially in North America.
That has rivals scrambling to catch up.
Google parent company Alphabet, which has historically struggled with hardware, has increasingly been taking a “buy versus build” approach. Early this year it dipped its toes in the water by acquiring a smartwatch technology unit from the watchmaker Fossil Group. On Friday, it took the more ambitious step of acquiring Fitbit for $2.1 billion.
The purchase price values Fitbit at less than 2x the company’s annual revenue, which was $1.51 billion in 2018. That’s a low multiple for a tech industry acquisition, and reflects the company’s declining business under pressure from the Apple Watch in particular. Fitbit had struggled to meet investor expectations, facing declining sales and challenging margins.
What Google gets
The deal does make sense for Google on some fronts.
Brand recognition. Unlike Google’s own wearables brand, Android Wear, Fitbit does have brand recognition in the wearables market and has sold more than 100 million devices.
Medical applications. Over time, Fitbit has made some smart steps in moving from being a wellness device for fitness enthusiasts to adding more medical functions, such as detecting cardiac arrhythmia and sleep apnea. That could help vault Google into the $3.5 trillion health care sector.
Health industry relationships. Fitbit is further along in establishing relationships with the health industry than Alphabet, which has been also dabbling with wearables out Verily, its life sciences unit, but doesn’t have deals with major health plans and employers under its belt.
Data. Google is well aware that consumers don’t trust it as much as Apple when it comes to health data, so the company went out of its way to note that Fitbit data would not be used to sell ads. Nonetheless, Google could use the anonymized data in a lot of other ways, including to help train artificial intelligence programs to understand human health better.
Huge challenges ahead
But it’s still going to be a challenge for Google to catch up to Apple in health.
Apple’s huge head start. Apple first launched the Apple Watch in 2015, and wearables is already a core part of its business — it was Apple’s fastest growing business segment in the quarter ended September 30. The company has been working for years on research in this area, including next-generation monitoring for blood pressure and blood glucose monitoring.
For Alphabet, wearables have never contributed significantly to its business, and its health-related research has been scattered all over the company, including in subsidiaries like DeepMind (artificial intelligence) and Verily (medical research).
Trust. At heart, Google is still an advertising company — it generates more than 80% of its revenue from ads — and that business relies on collecting and storing user data. Although Google promised it would not use Fitbit health and wellness data to sell ads, that may be little reassurance for consumers who are growing more aware of online privacy. Also, Google has faced some recent privacy flaps over how it uses data from customers, such as the revelation that it tracks purchase data via Gmail.
Health data is particularly sensitive, as it can be disastrous for consumers if it gets into the wrong hands. Potential enterprise customers, like health plans, are notoriously risk-averse, and might also view Apple as the “safer” bet.
User retention. Fitbit, like many other wearable devices, has struggled with retention. The company boasts 28 million users, but it has sold more than 100 million devices. That represents a potentially high churn, although some users might be ditching earlier generations of Fitbit devices when they buy a newer version.
There are many reasons so many wearable devices end up consigned to a drawer, including low battery life and the lack of actionable health insights. Apple is well aware of this problem, and has been snapping up behavioral scientists like Heather Patrick, so the race is now firmly underway for tech giants to develop a device that truly sticks.