Fitbit financials tumble but that might not worry Google

Fitbit might not be the profit bonanza it once was, but with sales increasing it offers Google another interface to collect data and launch new services.

Although the financial results do not seem the most attractive at first glance, it is always worth remembering what the new objective of this business is likely to be. Google acquired Fitbit in November, and while the Mountain View residents never say no to money, there is a bigger picture.

Fitbit is most likely about exposure, increasing the number of Google interfaces in society and offering more opportunity for the internet giant to create services. This is where Google’s expertise lies, in software not hardware, but it does occasionally need to encourage the development and adoption of supporting ecosystems to realise its own goals. If more smart devices are being worn by consumers, the greater the opportunity for Google to make money.

“In 2019, we continued to advance our mission of making health accessible to more people around the world by delivering devices, software and services at affordable prices that help improve peoples’ health,” said CEO James Park.

“As a result, we sold 16 million devices and our smartwatch business grew 45% at retail, due to strong demand for Versa 2. Our community of active users increased to nearly 30 million, and Fitbit Health Solutions grew 17%, underscoring the strength of the Fitbit brand.”

2019 2018 Change
Total Revenue 1,434.8 1,512 (5%)
Net Income (120.8) (320.7) (264%)
Devices Sold 16 13.9 15%
Monthly Active Users (MAUs) 29.6 27.6 7%

Figures in millions (US$)

The full year financial measurements are clearly not heading in the right direction, though part of this can be attributed to the average selling price of the devices decreasing 17% to $87. This trend is thanks to the decision to introduce more accessible and affordable devices, increase the range of devices and various promotions or offers.

Perhaps the most important statistic to note here is the number of devices sold over the period. This is up 15% on 2018, while 61% of sales came from completely new customers. For the repeat customers, 54% came from customers who were inactive during a prior period meaning Fitbit is re-engaging those it might have lost as well.

Google might have spent $2.1 billion to acquire the Fitbit business, but it was highly unlikely going to be driven by the direct revenues it would achieve. $1.434 billion is nothing to turn you nose up at, but it is a drop in the ocean if Google can scale wearable devices in the same way it has done to smart speakers.

Prior to the entry of Google and Amazon, the smart speaker segment was sluggish. Adoption was almost non-existent, and interest was even lower. But in introducing their own, more affordable, devices and very cash-intensive advertising campaigns, these two internet giants drove up engagement and sales, whilst also forcing competitors to create their own products.

Looking at the final quarter of 2019, Strategy Analytics estimates that 55 million devices were sold globally, with Google collecting a 24.9% market share. Others are catching-up, but that won’t bother Google.

The more smart devices which are in the world, the more opportunity there is for Google to own the platform which services are build on and through. Android extends the Google influence into the smartphone world, the smart speaker gives it a voice interface in multiple rooms in the home and Wear OS is a version of Google’s Android operating system designed for smartwatches and other wearables.

From here on forward, pay a bit of attention to the financials of Fitbit, but be more interested in the number of devices which are being sold and the number of customers who are signing up to not only Fitbit’s health monitoring services, but also Google’s. This is a new data treasure trove for Google and a further opportunity to monetize digital lifestyles through a new interface.

The beginning of the end: VodafoneZiggo switches off 3G network

The Vodafone and Liberty joint-venture VodafoneZiggo decided to switch off its 3G network to bring “The Netherlands much faster, safer and stabler mobile internet.”

In a release called “End of the 3G era”, VodafoneZiggo announced that “as of February 4th 2020, Vodafone will take its 3G network off the air.” The company, one of the first mobile operators to switch off 3G, explained the main rationale behind the decision is to free up frequencies for 4G, so that consumers currently only served by 3G networks can enjoy mobile internet “a fraction better”. Deploying 5G in the future on the frequencies made available is also on the card.

VodafoneZiggo warned those consumers that have held on to their phones since before its 4G service went live in 2013 that they may lose internet connections on their phones. It also suggested old SIM users order new SIMs with 4G enabled.

3G, first switched on by NTT DoCoMo in 2001, has been using 900MHz and 1800MHz in Europe and Asia Pacific, the frequencies that are valuable for mobile operators to roll out newer generations of wireless technologies to large proportions of the population. Meanwhile, the 384kbit/s data rate supported by 3G does not allow too much mobile internet to run on it.

It was only when 4G, with much higher data rate (theoretically up to 100Mbps downlink), was widely deployed did the whole mobile internet ecosystem start to flourish. So, it makes sense for the operators to drop the curtain on 3G and refarm these frequencies for 4G and 5G, which will generate higher returns.

Ironically although 3G went live 10 years after the first GSM network was launched (in 1991 in Finland), we may see 2G networks last longer. It is not so much that many people are still making phone calls or sending text messages over 2G, as it is powering large wide area IoT networks, such as utility metering, thanks to 2G’s low power consumption and wide coverage. The industry has also recognised this generational skip. For example, some Open RAN compatible radio products have been designed to support both 2G and 4G without bothering about 3G.

Telefónica doubles down on the smart home

Telefónica has created a global unit, known as the Chief Digital Consumer Office (CDCO), which will champion new digital products and services, paying particular attention to the smart home.

Led by Chema Alonso, the team will aim to drive forward the Aura AI digital assistant, as well as continue the creation of the ‘fourth platform’. The initiative will help take Telefónica into the digital era across several areas, but there does seem to be particular attention being paid to the smart home ecosystem.

José Montalvo will become Chief Data Officer, with a primarily focus on the development of the fourth platform project, including integrating new products and services such as Aura onto the platform. David del Val will become Director of Core Innovation, with a particular focus on edge computing. Antonio Guzmán is the Director of Digital Home, tasked with overseeing the development of the smart home and digital services ecosystem.

These are only a few of the names, but it does appear Telefónica is hoping to create a standardised smart home ecosystem for the markets which it currently operates in. This is an incredibly intelligent approach to creating value in the future, and with its global presence, Telefónica can provide competition to other players who are attempting to create a platform to control the smart home ecosystem.

This initiative builds on progress being made in the smart home following the announcement of a partnership with Microsoft at Mobile World Congress last year.

Alongside Microsoft boss Satya Nadella, Telefónica CEO Jose Maria Alvarez-Pallete launched the fourth platform initiative in attempt to own the smart home ecosystem, seemingly learning from the ‘walled garden’ business model which has been so successful for the likes of Facebook.

In this model, Telefónica leverage its relationship with the users, creating a platform for third parties to offer products and services. Telefónica will of course offer its own services, such as content, but why not create revenue by monetizing the link between the user and other companies in the digital economy.

While the smart home is still emerging as a viable segment in the digital economy, this is a very intelligent move from Telefónica . Connected objects are becoming more common, as there will need to be a focal point to manage this ecosystem, but also guarantee security. Telefónica has a trusted relationship with the consumer, a recognised digital assistant and the power of Microsoft as a partner. This is not a guarantee, but at least Telefónica is trying something new under the threat of the connectivity industry becoming commoditised.

Wearables and services are paying off for Apple

The iPhone is still the biggest contributor to the monstrous profits Apple claws in each quarter, but efforts in wearables and services are balancing out the company.

While Apple is not a company which is going to go bust at any point in the foreseeable future, the dependence on the performance of the iPhone was leaning onto the unhealthy side. With more consumers leaning towards second-hand, refurbished devices, or extending the life of products due to the eye-watering price of new iPhones, there was a threat to profitability.

For the most recent quarter, there are no worries about the profitability of Apple, however. Total revenues for the three-month period, including Christmas sales, stood at $91.8 billion, a 9% increase from the same period in 2019. Net income set a new record of $22.2 billion, while international sales accounted for 61%.

That said, efforts over the last few years to supercharge alternative revenue streams and diversify the profit channels have certainly been paying off. The iPhone is still king at Apple, but it is evolving into a different company.

Quarter Product Revenue Software and Services Revenue Ratio
Q1 2020 79,104 12,715 86.2/13.8
Q1 2019 73,435 10,875 88.2/12.8
Q1 2018 79,768 8,471 90.4/9.6

For the purpose of continuity, we have only selected Q1 for the above comparison. This is a quarter which contains the Christmas period and therefore revenues are almost incomparable to the rest of the year.

As you can see, there is a clear trend of Apple become less reliant on hardware for revenues and profits, with the Software and Services becoming more than a bolt-on bonus for investors. $12.715 billion is an amount most companies would be happy to call group revenues for the year.

Interestingly enough, even in the ‘product’ segment, the team is becoming less reliant on the iPhone to drive revenues and profits.

Quarter iPhone Mac iPad Wearables and Home
Q1 2020 55,957 (60.9%) 7,160 (7.8%) 5,977 (6.5%) 10,010 (10.9%)
Q1 2019 51,982 (61.6%) 7,416 (8.8%) 6,729 (8%) 7,308 (8.7%)
Q1 2018 61,576 (70%) 6,895 (7.9%) 5,862 (6.6%) 5,489 (6.2%)

In short, diversification of revenues is an excellent way forward for the Apple business and demonstrative of the power of the Apple brand.

Apple is a brand which certain consumer identify with, and such is the innovation and creativity of the Apple marketing department, loyalty has been almost cult-like. Cross-selling alternative products when the consumer is so heavily invested in the brand and ecosystem is a much simpler task, this will be one of the reasons Apple’s services division is becoming so successful, but it also explains the growing wearables segment.

Wearables is a family of technologies which has struggled through the years. The first smart watch, in its current form, was released in 2011, though the segment has never really gained the traction to make it an attractive business. Apple has been persisting with its own portfolio of smart watches for years, but it does now appear to have turned a corner.

“Apple Watch had a great start to fiscal 2020, setting an all-time revenue record during the quarter,” CEO Cook said during the earnings call. “It continues to have a profound impact on our customers’ lives and it continues to further its reach as over 75% of the customers purchasing Apple Watch during the quarter were new to Apple Watch.”

Apple is no-longer simply satisfying product refreshment cycles but attracting new customers into the smart watch bonanza. The more smart watch customers there are, the more normalised the product becomes, which then compounds the success, especially with more digital natives entering their 20s and collecting bigger salaries.

Apple is a company which is defined by iPhone. This will not change, such is the success of the product and the importance of the smartphone in today’s society, but diversifying the business was always viewed as critical to expanding the profitability of the firm. Apple is doing a remarkable job of capturing new revenues.

UK imposes new IoT rules designed to improve safety

The UK Government has unveiled new rules for the growing consumer connected objects segment, forcing the ecosystem to take a more rigorous and conscious approach to security.

The new law has been drafted by the Department for Digital, Culture, Media and Sport (DCMS), focusing on three requirements for the manufacture and sale of connected objects in the UK:

  1. Devices must have unique passwords and no ‘factory reset’ option
  2. Reporting functions for vulnerabilities must be created by all manufacturers
  3. Consumers must be made aware of the minimum length of time security updates will be received for the products at the point of sale

Although connected devices have been flooding onto the market in recent months, the security credentials of some are questionable. There are likely to be many reasons for this, though the pursuit of profitability is likely to be sitting at the top of the list.

Security is a growing concern for the general public in an increasingly digital society, though the risks are still greatly undervalued. It would be safe to assume only a small number of consumers would genuinely veto a purchase due to digital security concerns, and in the absence of consumer pressure for greater security, the Government is seemingly forcing the hand of the IoT ecosystem.

“We want to make the UK the safest place to be online with pro-innovation regulation that breeds confidence in modern technology,” said Digital Minister Matt Warman.

“Our new law will hold firms manufacturing and selling internet-connected devices to account and stop hackers threatening people’s privacy and safety. It will mean robust security standards are built in from the design stage and not bolted on as an afterthought.”

The industry on the whole has been gradually moving towards the concept of ‘Secure by Design’ though the question is whether this progress is fast enough to prevent serious consequences. And to be fair, consumers are becoming more aware of the risks of a digitally orientated society. However, the fact that data breaches and leaks still occur validates the argument that security attitudes are not evolving fast enough.

“Smart technology is increasingly central to the way we live our lives, so the development of this legislation to ensure that we are better protected is hugely welcomed,” said Nicola Hudson, Policy and Communications Director at the National Cyber Security Centre.

“It will give shoppers increased peace of mind that the technology they are bringing into their homes is safe, and that issues such as pre-set passwords and sudden discontinuation of security updates are a thing of the past.”

This is perhaps the risk which is being faced today. As these devices are just making their way into mass market purchases, new customers are being engaged, and perhaps these new customers are not technology-enthusiasts. Some might consider purchasing a TV today as no different from a decade ago, therefore not appreciated the risk which a gateway to the internet creates.

The question is whether this is the best approach to ensure security?

The consumer IoT space is an incredibly fragmented and embryonic ecosystem. There are a huge number of inventors attempting to create the next big thing and companies attempting to embed connectivity into everything or anything. It is a lot of moving parts and plenty of opportunity for something to go wrong.

Some companies might go out of business, and therefore stop offering security updates. In the mad rush to get products to market, some elements might be overlooked. And of course, there are those who will simply ignore the rules.

This might sound negative, but it is reality. The Government is not doing anything wrong by suggesting this new law, it is certainly progress to force more security conscious products onto the market, but there are of course challenges to be aware of also. But as with every challenge, there is an opportunity to be the good guy.

Security solutions for digital products are nothing, anti-virus software has been around for decades after all, but security platforms to manage all connected objects inside the home are not common. This is not to say products should not be ‘Secure by Design’ but added layers of security, and a proposition which helps manage the complexities might well be a product more digitally aware consumers would buy into.

In creating these new rules, the ecosystem is being forced down the right path, while it promotes the concept of cybersecurity in the minds of the consumer also. The more aware, and afraid, the consumer is of the dangers of a digital society, the more likely they are to spend money. The question is, who could create a platform to address this area? The telcos are in a strong position, but you can bet Big Tech is already investigating.

Philips files wearables patent complaint against Fitbit and Garmin

The US International Trade Commission (USITC) has said it will formally kick-off an investigation into Fitbit, Garmin and other parties, following a patent complaint from Philips.

Although the original filing was made last month, the probe into now Google-owned Fitbit, Garmin, Ingram Micro, Maintek Computer and Inventec Appliances can now begin after a vote from the USITC. Philips has suggested the parties have violated three of its patents in health monitoring and smart watch products.

Details might be a bit thin on the ground, though the three patents which Philips believes are in violation are:

  • US Patent No. 7,845,228: Activity motion tracking
  • US Patent No. 9,820,698: Actigraphy methods and apparatuses
  • US Patent No. 9,717,464: A continuous transdermal monitoring system
  • US Patent No. 9,961,186: A Personal Emergency Response System (PERS) system which is not confined to the individual’s home

Although Garmin and Fitbit are well known for their notable presence in the fitness wearables market, Philips has carved its own niche in the highly lucrative healthcare space. It might not be as ‘sexy’ a segment, but it can prove to be incredibly profitable, especially in a market such as North America where private insurance rules the roost.

Philips does have a presence in the consumer wearables space and has even launched a few smart watch products of its own, but these are considerably less successful that the Fitbit or Garmin alternatives. Success matters very little when it comes to patent violations, and Philips has requested the USITC block the import of the devices in question.

What is worth noting is this is not the first instance of bad blood between Philips and Fitbit.

During July 2019, Philips filed another patent infringement case filed in Massachusetts Court focusing on four different patents. These patents related to GPS, the security of data during transmission and fitness related applications. In this example, Philips claimed to have informed Fitbit about the violation, but the US firm did not respond to licensing calls. This case is on-going.

Xiaomi makes big noises with $7bn 5G, AI and IOT plan

In an open letter from its CEO, Xiaomi has promised to increase its R&D investments in 5G, AI and IOT to $7.18 billion.

In years gone, Xiaomi was a backwater Chinese brand which hoovered up the scraps of mid- and low-tier smartphone shipments. But such is the momentum the Chinese technology industry is generating, Xiaomi is now a major force across the world, and this investment is further evidence of the success.

“2019 was significant year for our global expansion, our overseas revenue now accounts for almost half of our total group revenue,” CEO Lei Jun said in the letter.

“Xiaomi is now truly global technology leader. Our internet business also became more diversified and our AIoT business retained its global leadership. Xiaomi is now widely known as a ‘true AIoT leader’ in the industry.”

The Xiaomi strategy has been focused acutely on the convergence of 5G, AI and IOT. All of the components mean something important to somebody individually, but with Xiaomi’s broad portfolio of consumer products, it is in an interesting position. From smartphones, to home appliances, security products and scooters, if Xiaomi can nail the ‘AIoT’ proposition it can enter into an entirely new world, moving into the ‘software and services’ segments.

For many, AI and IOT are two technologies which work hand-in-hand. They can of course work separately, but the greatest value is achieved together. The consumer world is where Xiaomi can slip into naturally, but the emerging segment of Industry 4.0 is also open to the ambitious Chinese OEM.

What is worth noting is this is not a new investment but supercharging an existing one. Xiaomi had already committed $1.43 billion over the next five years, though this has now been aggressively pushed up to the $7.18 billion over the same period. Throwing cash at an opportunity is no guarantee of success, but it does certainly shift the odds.

California drives forward with autonomous delivery

California has opened the traps for wide-scale testing and commercial application of autonomous vehicles for delivery companies across the state.

The application process for testing the vehicles will be almost exactly the same as that for autonomous passenger delivery vehicles, though if the companies involved want to charge a delivery fee to customers, an additional commercial licence will also have to be sought. The licences will cover self-driving systems in passenger cars, midsized pickup trucks and cargo vans, and may not have to feature a back-up safety driver.

“The adoption of these regulations means Californians soon could receive deliveries from an autonomous vehicle provided the company fulfils the requirements,” California DMV Director Steve Gordon said. “As always, public safety is our primary focus.”

The conditions for licences which include a safety driver are largely as you would expect, though the DMV has taken a somewhat surprising step by creating a separate list of requirements for vehicles where there is no back-up option.

  • Permission from the local authorities
  • Provide a link between the vehicle and a remote operator
  • Provide a link between the vehicle and law enforcement agencies
  • Demonstrate the vehicle can meet Level 4 or Level 5 under the Society of Automotive Engineers (SAE) autonomous technology descriptions

There are of course other conditions, including cybersecurity certifications. Interestingly enough, the cybersecurity element is a bit hazy. Whereas other conditions have been linked to specific bodies or agencies for certification, the security element needs to ‘meet industry standards’, a very nuanced term.

As it stands, there are currently 65 companies in California who have permits to test autonomous vehicles. These companies include all the automotive giants which you would expect, as well as the software firms powering the ‘brain’ of the vehicle, though we suspect this list will start to grow very quickly.

The larger logistics and delivery companies will of course want to be involved here, while we suspect there will also be entrepreneurs who will want to create their own fleet to serve smaller companies who exclusively focus on the primary business. Bob’s Burger down the road will never own its own fleet of autonomous delivery vehicles, but it could offer a slice of profits to make use of a supplier’s vehicles.

Facebook sets out to create its own OS

Facebook has reportedly hired ex-Microsoft employee Mark Lucovsky to oversee the development of its own operating system to reduce the dependence on Google’s Android.

While many have tried and failed to muscle in on the Android dominance in the OS world, Facebook has largely sat back to benefit from the success of Google. That said, according to The Information, in hiring the man who co-authored the Windows NT operating system Facebook is attempting to break-free of the Android shackles.

Although there is no official confirmation from the social media giant, it does make sense. Facebook is not going to be fighting Android for a share of the mobile OS segment, though it allegedly wants more control of its own fate when it comes to the Portal and Oculus portfolios.

“We really want to make sure the next generation has space for us,” Facebook’s Head of Hardware Andrew Bosworth said during the interview.

“We don’t think we can trust the marketplace or competitors to ensure that’s the case. And so we’re gonna do it ourselves.”

With the Portal smart home devices, VR head Oculus and AR glasses codenamed Orion, Facebook is creeping more and more into the physical world. It might not be the traditional stomping group for Zucks and co. though these are emerging environments where the rules have not been written yet.

What is worth noting is this is not the first time Facebook has attempted to create an OS. In 2013, Facebook launched an OS which ran on some HTC phones, but it should not be under-emphasised how much of a disaster this way. It was a catastrophic failure.

However, the playing field is slightly different now. This is not an OS which is trying to replicate the Android experience on mobile, Facebook is attempting to define its own experience on these devices and dictate its own product development cycle.

Big Tech sign-up to make smart home standards

Apple, Amazon and Google are joining forces with the Zigbee Alliance to form the Connected Home over IP project to create universal standards for the smart home ecosystem.

The aim of the project is simple; get ahead of the game and reduce the potential for ecosystem fragmentation in the smart home. With Apple, Amazon and Google on board, the working group has access to the worlds’ most popular virtual assistants and can drive towards creating a framework which encourages interoperability and compatibility.

“Our goal is to bring together market-tested technologies to develop a new, open smart home connectivity standard based on Internet Protocol (IP),” Google’s Nik Sathe and Grant Erikson wrote on the company’s blog.

“Google’s use of IP in home products dates back to the launch of Nest Learning Thermostat in 2011. IP also enables end-to-end, private and secure communication among smart devices, mobile apps, and cloud services.”

While it might seem slightly unusual that the internet giants are attempting to collaborate without being forced to, the bigger picture makes it a bit more logical.

The likes of Google, Apple and Amazon are looking to make more money from the software and services elements of the smart home ecosystem. This is an admirable quest, though for money to be made there needs to be mass adoption of smart home products.

As it stands, smart home devices manufacturers are facing a conundrum. Either, spend a lot of money to make sure devices are compatible with all the different smart home ecosystems which are developing, or pick a winner and risk losing out on customers who will exist elsewhere. By creating universal standards for the smart home ecosystem, the manufacturers will theoretically be more encouraging to engage in this emerging segment.

What is always worth remembering is that while the likes of Google and Amazon currently sell smart home devices, there will be a lot more money for these companies on the software side when smart home products are adopted on scale. This is their bread and butter after all, with a plethora of existing relationships already in place. Looking at Apple, this is a company which manufactures premium devices, but has some very aggressive ambitions in the software and services world. This is where CEO Tim Cook envisions growth for the company in the future.

Ultimately this is a good sign for the industry. Collaboration is a word which is thrown around so much nowadays it is almost meaningless, but when it results in universally accepted standards to drive interoperability and compatibility, there is something genuinely exciting to look forward to.