Google and Fitbit – No Panacea.

Engineering disease bill rises to $16bn.

• Doctor Porat has been able to do very little to treat Google’s chronic case of engineering disease (see here), the bill for which is about to rise to $16bn (hardware acquisitions minus divestments) and where the outlook remains very difficult.
• Fitbit has done what I always thought it would to do (see here) and has sold out to Google for $2.1bn.
• However, adding Fitbit to Google’s hardware division is not about to cause Apple any problems at all as I don’t see what extra value being inside Google will bring to Fitbit users and vice versa.
• Google intends to acquire Fitbit for $7.35 per share ($2.1bn total) which is less than half the valuation at which it went public in 2015 but even that does not look very cheap.
• This is because, Fitbit is not faring well as it seems to be only able to grow revenues by making cheaper and cheaper devices which are not able to collect really meaningful data and often end up in a desk drawer after several months.
• To be fair to Fitbit, its devices remain on the wrist of the user up to 3 times longer than those of Huawei, Samsung or Xiaomi, but I do not believe that the user base that Google is buying is actually very valuable.
• This is for 2 reasons
  • First, size: In 2017 Fitbit had 25m users which if I am extremely generous might now be somewhere around 35m to 40m now.
  • This means that at the midpoint of that estimate (37.5m) Google is paying around $56 per user to acquire Fitbits user base and its data.
  • The value of this is somewhat undermined as Fitbit has already signed up to use the Google Health API meaning that Google may already have access to a lot of this data.
  • Furthermore, the user base is well adrift of what I would consider critical mass (circa 100m) meaning that without great execution on Google’s part, it could easily disintegrate.
  • Second, engagement and data: User engagement with wearables (outside of the Apple Watch) is a major issue.
  • Very often the user gets tired of the device after a few months and it disappears into a desk draw, never to see the light of day again.
  • Fitbit’s engagement is much better than most, but it is mainly for the trackers that simply track steps and very little more.
  • This means that the data collected by Fitbit is pretty thin, and in many cases, probably inconsistent.
  • If anyone can use AI to make sense of it, its Google but I struggle to believe that, even with Google super insights, this data is worth $56 per user.
• It is clear that Fitbit will now adopt Android Wear right across its range, but I suspect that the very low-end trackers may well stay on their current RTOS and move to Fuchsia when it launches.
• I suspect that this also means that Google will launch with a Fitbit branded device, in an attempt to take on the dominant Apple Watch.
• To get the optimum performance, the user will need to be fully committed to the Google ecosystem of hardware products (like Apple Watch) and the issue here is that very few users are.
• Even then, I suspect users will be asked to pay Apple and Samsung prices which will also serve to dissuade users.
• The net result is that Apple will be losing no sleep at all over this move.
• Given Alphabet management’s apparent disdain for hardware, I suspect Dr. Porat will sign away another $2.1bn with gritted teeth.