Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google agreed to buy wearables maker Fitbit (NYSE:FIT) for $2.1 billion last November. Google expected to close the purchase in 2020, but several recent probes could postpone the deal.

Earlier this year, the U.S. Department of Justice, which previously expressed concerns about Google's acquisition of Fitbit's personal data, requested more information from both companies regarding the deal. Google hasn't cleared that hurdle yet, but it now faces fresh demands for closing the deal in the European Union, according to The Financial Times.

The EU reportedly wants Google to pledge it won't use Fitbit's data to "further enhance" its online searches, and that it won't block other companies from accessing Fitbit's data. The EU plans to rule on the deal before Aug. 4, but Google could face a long antitrust probe if it refuses to make those concessions.

Fitbit's Versa smartwatch.

Image source: Fitbit.

That's troubling, since Google needs close the deal before its deadline on Nov. 1 -- which can be extended to May 1, 2021 at the latest -- before a $250 million breakup fee kicks in. Google can easily afford that penalty, but losing Fitbit would represent a big setback for its wearable strategy.

Why are people skeptical about Google's goals?

Google recently claimed the Fitbit deal was "about devices, not data," and that it would work with EU regulators "on an approach that safeguards consumers' expectations that Fitbit device data won't be used for advertising."

However, Google's promise raises eyebrows, because it still generates most of its revenue from its high-margin advertising business. Meanwhile, Fitbit's revenue declined 5% to $1.43 billion last year, due to intense competition in the lower-margin fitness tracker and smartwatch markets, and its net loss widened from $49 million to $132 million. 

Tethering Fitbit's community of nearly 30 million active users to Google's data-mining ecosystem, which powers its targeted ads, would arguably justify that purchase and the integration of its lower-margin hardware business. But keeping Fitbit in a stand-alone silo, which is still struggling against Apple (NASDAQ:AAPL), Xiaomi (OTC:XIAC.F), and other rivals, wouldn't strengthen Google's core business.

What's at stake for Google?

Over the past four years, Google expanded into the smartwatch market with Android Wear and its successor Wear OS. However, Wear OS still accounts for a sliver of the wearables market, which remains fragmented between Apple's watchOS and other proprietary platforms.

Apple controlled 31.7% of the market in 2019, according to IDC, up from 27% in 2018. Xiaomi, which recently launched a Wear OS smartwatch but mainly sells cheaper fitness trackers, ranked second with a 12.4% share.

Samsung and Huawei held 9.2% and 8.3% shares, respectively. Samsung uses its own smartwatch OS, while Huawei sells a few Wear OS devices. Fitbit, which uses its own proprietary OS and App Gallery, ranked a distant fifth with a 4.7% share -- down from 7.8% in 2018.

Fitbit's fitness trackers and smartwatches.

Image source: Fitbit.

Google likely realized that it needed its own hardware to unify the fragmented Wear OS market. That's why it acquired Fossil's smartwatch technologies for $40 million last year, and presumably why it agreed to buy Fitbit.

Converting Fitbit's smartwatches to Wear OS could strengthen that platform, and merging Fitbit's users with the broader Google ecosystem could strengthen Google Fit, the dashboard that competes against Apple Health, and represent a natural extension of Fitbit's existing data storage partnership with Google Cloud. It would also complement Alphabet's other healthcare ventures, including Verily, which develops healthcare-oriented AI services and devices, and Calico, which researches treatments for various diseases.

Google could still accomplish many of those goals without tethering Fitbit's user data to its search engine or barring other companies from accessing its APIs. However, the lack of exclusive synergies would make it tougher for Google to justify a full takeover of Fitbit -- when a simple partnership would be cheaper, simpler, and attract less regulatory scrutiny.

Should Google's investors be concerned?

Losing Fitbit wouldn't be a huge blow for Google, since the takeover would only have boosted Alphabet's annual revenue by about 0.5% while denting its margins. But that loss could hurt Google's long-term plans in two ways.

First, Google could fall further behind Apple and other ecosystem rivals in the global wearables market, which Research and Markets estimates will still grow its shipments at a compound annual growth rate of nearly 20% between 2020 and 2025.

Second, the loss could set a precedent for Google to be barred from inorganically expanding in other markets -- like connected cars and Internet of Things devices -- for similar reasons. Those losses could make it tougher for Google to expand its ecosystem beyond online searches and diversify its top line away from ads.

The key takeaways

Despite all the recent regulatory challenges, I don't expect Google to fumble the Fitbit deal. Google will likely implement tighter rules regarding the usage of Fitbit's data, as it did with its short-lived Clips camera, instead of walking away. However, investors expecting the full-blown integration of Fitbit's data with Google's digital advertising business will likely be disappointed.