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.

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.

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.

Fitness tracker use is exploding in the US, especially among rich young women

A recent Pew survey shows 21% of US adults regularly wear a smartwatch or fitness tracker. Over half of them think it acceptable for the device makers to share user data with medical researchers.

According to the survey results shared by the Pew Research Center, an American think-tank, smartwatch and fitness tracker adoption may have crossed the chasm from earlier adopters to early majority. 21% of the surveyed panellists already are regularly using smartwatch or specialised tracker to monitor their fitness.

Such a trajectory is in line with the recent market feedback that the total wearables market volume has nearly doubled from a year ago (though what counts as wearables may be contested), and both wristbands and smartwatches have grown by nearly 50%.

When it comes to difference in adoption rates between social groups, the penetration went up to nearly a third (31%) among those with a household income of over $75,000. In comparison, among those with a household income of less than $30,000, only 12% regularly wear such a device. In addition to variance by income groups, women, Hispanic adults, and respondents with a college degree and above are also more likely to wear such devices than men, non-college graduates, and other major ethnic groups.

Another question on the survey asks the respondents if they think makers of a fitness tracking app can share “their users’ data with medical researchers seeking to better understand the link between exercise and heart disease”. The response is divided. 41% of all the respondents said yes, as opposed to 35% saying no, while 22% unsure. However, the percentage of those believing such sharing acceptable went up to 53% among the respondents that are already regularly using such devices, compared to 38% among the non-adopters.

Due to the lack of a GDPR equivalent in the US, it is not much of a surprise that there is neither a consensus among users nor a standard industry practice related to user data sharing. “Recently, some concerns have been raised over who can and should have access to this health data. Military analysts have also expressed concern about how third parties can use the data to find out where there is an American military presence,” Pew said in its press release.

Meanwhile, how useful the data tracked by the devices can be for medical research purposes may also be debatable. For example, even the best of the devices, the Apple Watch, does not qualify as a medical device, despite its being “FDA certified”.

The survey was conducted by Pew from 3 to 17 June 2019. 4,272 qualified panellists responded to the survey.

The next generation of Bluetooth audio looks good

At CES 2020 the people who run the short range Bluetooth wireless standard unveiled a new version of its audio technology that promises a lot of new features.

The Bluetooth SIG (special interest group) is calling its next generation LE Audio as it is an evolution of Bluetooth Low Energy. Indeed LE Audio uses a new codec called LC3 that promises to improve sound quality while significantly reducing the power requirement. This in turn should enable even smaller wireless earbuds and that sort of thing.

“Extensive listening tests have shown that LC3 will provide improvements in audio quality over the SBC codec included with Classic Audio, even at a 50% lower bit rate,” said Manfred Lutzky, Head of Audio for Communications at Fraunhofer IIS. “Developers will be able to leverage this power savings to create products that can provide longer battery life or, in cases where current battery life is enough, reduce the form factor by using a smaller battery.”

On top of that this new tech comes with multi-stream audio for the first time. “Developers will be able to use the Multi-Stream Audio feature to improve the performance of products like truly wireless earbuds,” said Nick Hunn, CTO of WiFore Consulting and Chair of the Bluetooth SIG Hearing Aid Working Group. “For example, they can provide a better stereo imaging experience, make the use of voice assistant services more seamless, and make switching between multiple audio source devices smoother.”

Similarly another new feature enables multiple BT peripherals to access a singe audio source. This is handy not just as another way of sharing audio content, but also for location based audio that could intrude upon your listening, presumably with permission. The low power aspect also allows better support for hearing aids, which could also benefit from the broadcast feature for things like safety announcements.

“Location based Audio Sharing holds the potential to change the way we experience the world around us,” said Peter Liu of Bose Corporation and member of the Bluetooth SIG Board of Directors. “For example, people will be able to select the audio being broadcast by silent TVs in public venues, and places like theaters and lecture halls will be able to share audio to assist visitors with hearing loss as well as provide audio in multiple languages.”

It seems safe to assume that the Bluetooth chip in devices and peripherals will support this next generation from now on. Assuming it delivers as advertised there’s nothing to dislike about Bluetooth LE Audio. It seems to be a solid evolution of the technology that should improve the digital audio experience for people with nearly all levels of hearing capacity.

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.

Wearables market doubles, but only if you include wireless headphones

The latest global wearable device market numbers from IDC reveal it grew by 95% in Q3, but much of this came from a category that didn’t used to be counted.

The launch by Apple of its AirPod earphones provided a general boost to the Bluetooth headphones market. Wired headphones never used to be included in assessments of the wearables market but, for IDC at least, the removal of those wires had been sufficient for them to qualify. As a result, a category that used to be comprised mainly of fitness bands and smart watches is now dominat3ed by earwear.

“Hearables have become the new go-to product for the wearables market,” said Ramon Llamas of IDC. “This began with multiple vendors removing the headphone jack from their smartphones, driving the move toward wireless headphones. It continued with hearables incorporating additional features that either augment or expand the audio experience. Next, hearables have taken on multiple form factors – ranging from truly wireless to over-the-ear headphones – appealing to a broad base of earwear user preferences. Finally, prices have come down significantly, with some reaching below $20.”

Not with Apple they haven’t. AirPods start at £159, going up to £249 for the Pro version. Nonetheless, Apple being Apple, it’s still shifting a ton of them. IDC reckons Apple tripled its total wearables shipments to 29.5 million units in Q3 and since there’s little evidence of an explosion in Apple Watch sales, much of this must be down to the AirPods. If Apple decides to ditch the lightning port, that trend seems bound to continue.

As you can see from the second table below, earware shipments are by far the biggest wearables category now and are almost entirely responsible for its rapid growth. However it’s highly debatable whether a single function accessory should be counted as a wearable device in its own right. Even fitness bands have some degree of smart functionality and the mere removal of a wires seems like a crude reason so suddenly designate something ‘wearable’, since the human interface has barely changed.

 

Top 5 Wearables Companies by Shipment Volume, Market Share, and Year-Over-Year Growth, Q3 2019 (shipments in millions)
Company 3Q19 Shipments 3Q19 Market Share 3Q18 Shipments 3Q18 Market Share Year-Over-Year Growth
1. Apple 29.5 35.0% 10.0 23.0% 195.5%
2. Xiaomi 12.4 14.6% 7.4 17.1% 66.1%
3. Samsung 8.3 9.8% 3.2 7.4% 156.4%
4. Huawei 7.1 8.4% 2.3 5.4% 202.6%
5. Fitbit 3.5 4.1% 3.5 8.0% 0.5%
Others 23.8 28.1% 16.9 39.0% 40.4%
Total 84.5 100.0% 43.4 100.0% 94.6%
Source: IDC Worldwide Quarterly Wearables Tracker, December 5, 2019

 

Worldwide Wearables Market by Product Category Shipment Volume, Market Share, and Year-Over-Year Growth, Q3 2019 (shipments in millions)
Product Category 3Q19 Shipments 3Q19 Market Share 3Q18 Shipments 3Q18 Market Share Year-Over-Year Growth
Earwear 40.7 48.1% 11.9 27.4% 242.4%
Wristband 19.2 22.7% 12.9 29.7% 48.6%
Smartwatch 17.6 20.9% 11.9 27.4% 48.0%
Others 7.1 8.4% 6.7 15.5% 4.7%
Total 84.5 100.0% 43.4 100.0% 94.6%
Source: IDC Worldwide Quarterly Wearables Tracker, December 5, 2019

 

Google pushes further into hardware world with Fitbit purchase

Google has announced it has entered into a definitive agreement to acquire wearables brand Fitbit as it further explores its options in the hardware segments.

While wearable fitness devices are certainly a long-slog away from Google’s core competencies, it has already shown it is able to gain traction in the hardware segments with the success of its smart speaker. With the Pixel smartphones, smart speakers, Chromebook, the Nest Thermostats and now Fitbit, Google is certainly spreading its wings.

“Three and a half years ago, I joined Google to create compelling consumer devices and services for people around the world,” said Rick Osterloh, SVP of Devices & Services.

“Our hardware business is still relatively young, but we’ve built a strong foundation of capabilities and products, including Pixel smartphones and Pixelbooks, Nest family of devices for the home, and more.

“Google also remains committed to Wear OS and our ecosystem partners, and we plan to work closely with Fitbit to combine the best of our respective smartwatch and fitness tracker platforms. Looking ahead, we’re inspired by the opportunity to team with Fitbit to help more people with wearables.”

Although this has been a rumour which has been circulating for a while, it certainly looks like a sensible move for the internet giant. This is another example of Google doing what Google does; throws money at an idea which it likes.

The core Google business model is a relatively simple one. Its services are some of the best available, however to continue growth it needs to ensure these services are being pushed into new ecosystems. For example, it started as a desktop application, before buying Android and dominating the mobile space, then when the voice user interface started to gather steam, it brought out a range of smart speakers. Each of these moves takes the core Google services into a new domain, and Fitbit is no different.

The wearables segment has constantly promised the world but delivered only a fraction, though there does seem to be gathering momentum. Smart watches and other wearable devices are becoming more popular, and it does offer Google another opportunity to interact with the consumer in a different environment.

Google currently has a voice assistant which allows for the voice user interface, Fitbit devices will soon enough be powered by Google’s Wear OS, while it has been doing some promising work in gesture control also. These elements would all link back to Google’s other services, such as the Mapping product or search engine. Fitbit looks like an attractive investment because it offers Google another opportunity to make money in another domain.

Despite being an incredibly sound brand, Fitbit has been suffering in recent years. It found fame and success in delivering a niche wearable device for fitness enthusiasts, though as the wearables segment slowly evolved, it did not. Other more complex devices evolved to offer fitness elements, stealing some of the shine from the Fitbit. Its own attempts to create smart watches have been hit and miss.

Fitbit does need to evolve its product beyond the niche fitness devices which it produces today, but to develop something which is competitive in a market with the likes of Apple, it will take cash. Fortunately, this is something Google can contribute with abundance. However, Google will have to make sure it lets Fitbit be Fitbit.

Google will have to make sure it leaves the Fitbit team on its own to hire the right people and design the right products. Google’s heritage is in software after all and wearables need to marry substance and style. We suspect a horde of software engineers might not be the best suited to get too involved.

Should Google leave the Fitbit team to create an excellent product, just like it left Nest on its own, and marry the devices to its wider service ecosystem, this could be a very crafty acquisition.

Google reportedly bids to acquire Fitbit

As Apple continues to progress in the wearables market, Google parent Alphabet is rumoured to be looking at buying Fitbit.

The goss comes courtesy of Reuters, which has been hanging out with people who reckon they have inside knowledge of the matter. The story had almost nothing else to say on the matter, other than it not being a done deal yet and somewhat redundantly stressing that it’s sources are anonymous because they don’t want to be sacked for leaking stuff.

Stories like this often come from official, but clandestine channels with one or both of the companies in question. One reason for the acquiring company to do such a things is known as a trial balloon, in which it leaks a rumour to see how the market reacts. In this case Fitbits shares were up 27% at time of writing, but that’s probably just in anticipation of the typical premium paid for an acquisition. Perhaps more telling is the fact that Alphabet’s chares are up 2-3% on the rumour.

Google tends to buy device companies to contribute to the associated ecosystem around them, rather than a strategic aim to develop that line of business as a profit centre in its own right. The Android wearables market seems to have stalled, while Apple makes steady progress, so maybe Google had decided it’s time to intervene. Then again this could be a false alarm, in which case anyone who flogged their Fitbit stock today will be feeling pretty smug.