I understand what everyone is upset about, but allow me to play devil’s advocate.
Nov. 25, 2019
Perhaps by now, you’ve heard: Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) has submitted a $2.1 billion bid to purchase Fitbit (NYSE:FIT). The proposal throws shareholders in the wearables pioneer a lifeline, giving them an exit from what has been a train wreck of an investment.
But the prospect of this acquisition has generated a fair amount of angst among those who are concerned about privacy and the anti-competitive business practices of the largest tech firms. Lawmakers and consumer privacy groups in the U.S. have expressed concerns — with some pressing for the deal to be blocked — and in the U.K., the Labour party has also said it wants to put the kibosh on it. A CNBC article even reported on Fitbit users who said they’ve ditched their devices after learning that the Google parent was about to buy the company.
I get it. Data privacy is a big deal, and the way firms like Alphabet — and the other half of the digital advertising duopoly, Facebook (NASDAQ:FB) — handle personal information has been called into question. Concerned parties are worried that Alphabet’s acquisition of Fitbit is another data grab, though it has vowed it will never sell the health information that Fitbit gathers about its users — for advertising, to insurance companies, or otherwise. Unfortunately, though, this issue isn’t so cut-and-dried.
Fitbit needs help. Remember, this bid wasn’t unsolicited. Reports surfaced earlier that management had been in talks with investment bank Qatalyst Partners over a potential sale.
The problem is that ever since Apple (NASDAQ:AAPL) released the Apple Watch in 2015, Fitbit has been in a slide. Its market share in the wearables space has plunged dramatically, and its healthcare technology ambitions have been stymied as well. To survive, it needs a benefactor with deep pockets and some serious tech know-how.
What are Fitbit’s other options? Going to a private equity firm where it would be gutted for maximum profitability? A sale to Samsung (OTC:SSNLF)? Dare I even mention Chinese outfits like Huawei or Xiaomi? Besides, all of those fitness tracking makers utilize Google’s Wear OS already anyway. And an acquisition by premium wearables maker Garmin probably isn’t in the cards, as that company isn’t exactly a tech giant. Nor is a bid from Fossil Group likely, as it already sold select smartwatch tech to Google early in 2019 for $40 million.
Regardless of the privacy or competitive implications, Alphabet may be Fitbit’s only hope.
Losing market share and bleeding cash
Fitbit was an early pioneer of the wearable fitness device, exploding onto the scene and taking an early commanding lead in the nascent industry. When the Apple Watch was released in 2015, Fitbit was riding high. Not incidentally, 2015 was peak Fitbit.
After proving that the concept was viable, Fitbit’s turf was encroached on by Apple’s premium offering. At the bottom end of the market, cheap alternatives led by Chinese tech firms also made their move. Overall, Fitbit has been unable to turn back the tide in its favor. According to data compiled by tech researcher IDC, it’s been all downhill for the last four years.
|Period||Company||Device Shipments||Market Share|
DATA SOURCE: IDC.
IDC reports that in the second quarter of 2019, Fitbit remained in fourth place with 3.5 million device shipments and a 10% market share. Xiaomi, Apple, and Huawei were the top three with market shares of 17%, 15%, and 14%, respectively. One might argue that fourth place is nothing to complain about. But here’s the problem: Fitbit is the only wearables pure-play on the list. Without a big technology ecosystem to plug into, that hasn’t been a good thing. The revenue and profitability picture tells the story. During the third quarter, for example, total revenue fell another 12% year-over-year, and adjusted losses widened as well.
DATA BY YCHARTS.
Clearly, Fitbit isn’t able to hang, which led inexorably to management’s decision to sell.
Don’t look at Apple like it’s an innocent party
Okay, so Fitbit’s foundation is crumbling. One might ask why Alphabet would want it in the first place. Again, the data from IDC tells the story. Wearable device sales overall have been growing by double-digit percentages, but outside of providing the Wear OS platform for Samsung and the Chinese outfits, Alphabet has little presence in the space. IDC expects the wearables market to grow at a compound annual rate of 7.9% through 2023, by which point global device shipments should exceed 300 million a year.
But here’s where it gets tricky, and why some are concerned. Selling devices is all fine, but those devices will underpin the more ambitious goals of big tech to disrupt healthcare — and it’s all about health data. With its commanding lead in the premium segment of the market, Apple is using the information it collects from the Apple Watch to fuel its healthcare plans — which include providing services for healthcare professionals and patients. Fitbit is attempting to build a similar business with connected services for health and wellness, and a health savings-sharing agreement with insurance providers. Lumped in with its premium services segment, that business has been losing steam fast for Fitbit. It only grew 10% in the third quarter and has generated just $73 million in sales year to date. This was supposed to be a game-changing opportunity for the company.
Meanwhile, Apple’s services segment keeps booming. The sprawling division encompasses healthcare services, as well as App Store sales, payments, music streaming, and storage services. Those concerned about privacy should also be looking at Apple and its hardware and software platform. It collects billions each year from none other than Alphabet in return for keeping Google as Apple’s default search engine. Apple may not be directly involved with the sale of personal info, but it certainly reaps the benefits of the practice. Yet, no one is questioning what Apple is doing with the health data it collects. Meanwhile, Google is trying to beef up its own healthcare service and tech aspirations to take a shot at the virtually unchallenged Apple offering, and Fitbit would go a long way toward helping it do so.
The way I see it, whether Alphabet gets its hands on Fitbit or not, the wearables industry is headed for further consolidation. The question everyone needs to be asking is whether we want Fitbit around to provide the competition everyone is looking for to maintain a level playing field. Data privacy should concern us, but the issues involved won’t be resolved simply by blocking Alphabet from making an acquisition. That ship left port a long time ago.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Alphabet, Apple, Facebook and Fitbit. Read our full disclosure policy here.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo owns shares of Alphabet (C shares), Apple, Facebook, and Fitbit. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Facebook, and Fitbit and recommends the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.