An unhealthy fit for Alphabet

Alphabet’s decision to pay $2.1bn for Fitbit looks even more peculiar in the wake of the fitness tracker company’s third-quarter results. Fitbit once led the pack on health tech but that was long ago. Falling demand for its devices mean the past quarter’s revenue is down 12% on the previous third quarter. It had a net loss of $52m (R988m) on revenue of $345m.

The stakes in this deal are low for Alphabet. Fitbit may cost more than YouTube did, but that was 13 years ago when Google’s enterprise value was a ninth of the $785bn parent company Alphabet’s is now. Fitbit’s expected revenue of $1.5bn will not alter the trajectory of Alphabet’s $150bn much. Nor will its 28-million active monthly users change a company that has eight products with more than a billion monthly active users each, including Google Search, Gmail and YouTube.

This is why paying a big premium looks too generous. The deal prices Fitbit shares at $7.35 each, 70% more than they were before talk of a deal began last week. More confusing still, Fitbit tells customers the data it collects will not be used for targeted advertising. It seemed commonsense to expect Alphabet to find a way to make health-monitoring data available. It seems Alphabet simply wants to find a way into smartwatches. Fitbit is likely to be slotted into its Wear OS platform, added to the engineering and design teams the company spent $1.1bn buying from smartphone maker HTC.

This could be a fast-growing business. Apple does not split out its own Watch sales, but its wearables unit, including Watches, had $5.5bn in sales in the past quarter, up from $3.7bn a year ago. Its decision to focus on specialist health tech drew positive attention. Alphabet is likely to want to do something similar. But using the expertise of a company that has failed to keep up with Apple is an odd way to go about it. /London, November 7

© The Financial Times Ltd 2019