Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google recently announced that it will buy Fossil Group's (NASDAQ:FOSL) smartwatch tech for about $40 million. The two companies didn't specify exactly what technology would be sold, but a "portion" of Fossil's R&D team would be transferred to Google.
This deal sounds similar to Google's acquisition of HTC's Pixel-making smartphone team last year, but it's much smaller than that $1.1 billion acquisition. In fact, the Fossil deal is much smaller than the other multi-billion dollar deals Google made to expand its hardware business.
However, Google's purchase of Fossil's assets indicates that it wants to expand Wear OS as a smartwatch operating system. Google was rumored to be developing a "Pixel Watch" last year to complement its new Pixel phones, but that fabled device never arrived. Let's take a look at how Google's deal with Fossil might finally move those plans forward.
A tough uphill battle
IDC forecast that Google's Wear OS would only run on 4.3% of all wearables by the end of 2018, compared to a 16.2% share for Apple's (NASDAQ:AAPL) watchOS. To further complicate matters, devices running on regular Android (not Wear OS) were expected to claim 6.4% of the market.
By 2022, IDC expects watchOS' share to rise to 17.3% as Wear OS and Android claim 9.8% and 8.7% of the market, respectively. Google probably can't ever fully merge Wear OS and Android, since stripped-down versions of Android power other smartwatches that aren't tethered to Google's ecosystem. A big problem with Wear OS is its fragmented market, which fails to deliver a strong brand message like the Apple Watch.
Yet Fossil carved out a niche as a successful Wear OS device maker. Fossil owns and licenses 14 watch brands, including its namesake watches, Tapestry's Kate Spade, Capri's Michael Kors, Armani, DKNY, Diesel, and Skagen. Strong demand for its Fossil, Kors, and Kate Spade smartwatches were bright spots in Fossil's otherwise weak earnings reports over the past few quarters.
Fossil doesn't plan to stop selling its own smartwatches, which generated nearly a fifth of its sales last quarter. Its devices are still improving, with new heart rate tracking, GPS, payment NFC, and quick charging technologies on its new Gen 4 platform. It also recently launched smartwatches powered by Qualcomm's Snapdragon Wear 3100 platform and Google's Wear OS.
But it won't lead to the Pixel Watch
Some industry watchers might think that Fossil's transfer of some IP to Google could lead to the launch of the Pixel Watch. But in a recent interview with Wareable, Fossil's chief strategy and digital officer Greg McKelvey stated that the transferred technology was for features that would initially debut on Fossil devices before Google launched them across the rest of the Wear OS ecosystem "over time to benefit all."
McKelvey also compared the deal to Fossil's takeover of Misfit, which strongly suggests that Google is merely procuring some of Fossil's smartwatch assets to add new features to Wear OS. Those new features would likely be timed exclusives for Fossil's ecosystem of Wear OS devices before being introduced to other OEMs by Google.
Fossil's devices already sport unique features, like Michael Kors' "My Social" app, which lets users set Instagram pictures as their watch backgrounds, and a streamlined heart rate reader on Kate Spade's Scallop 2 that scans a user's heart rate whenever an icon on the watch face is tapped. However, it still seems odd that Google paid Fossil $40 million for some mysterious special software features when it could have developed them internally and rolled them out in a Wear OS update.
Therefore the Fossil deal doesn't indicate that a Pixel Watch is coming -- it merely indicates that Google is running out of fresh ways to keep the Wear OS relevant after major OEMs like Samsung, Huawei, Sony, and Asus abandoned it. Unfortunately, Google's unwillingness to launch a first-party smartwatch of its own speaks volumes about Wear OS' future, and it's unlikely that a tiny deal with Fossil will help the tech giant dominate wearables in the same way it conquered smartphones.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Tapestry. The Motley Fool owns shares of Capri Holdings and Qualcomm and has 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.