The Real Reason Google Paid $3.2 Billion For Nest

The potential market for its products could be big, like really big

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Simon Dawson / Bloomberg / Getty Images

Anthony "Tony" Fadell, chief executive officer of Nest Labs Inc., in London in 2012.

Google’s ambitions are almost limitless, as it has proven time and again over the years. The company has pushed far beyond its roots in web search into smartphones, self-driving cars and robots. Even more is in the works.

On Monday, Google said it would pay $3.2 billion to acquire Nest Labs, a maker of sleek Internet-connected devices for the home that are controlled with a smartphone. Nest’s first two offerings, a thermostat and a smoke alarm, put a sci-fi twist on products that have barely evolved in decades. With the acquisition, Google gets a toehold in connecting all kinds of household devices to the Internet. The connected home, as its known, is shaping up as the next critical battleground in the technology industry, much like smartphones and tablets have been for several years.

“Google wants to be the connective tissue for all the devices and all the services in our lives,” said Jan Dawson, an analyst for Jackdaw Research.

The vision is to turn homes into something not entirely unlike “The Jetsons.” Ovens, refrigerators, crock-pots, door locks and light switches would all be tied to the Internet. Homeowners would be able to control everything using an app, no matter where they are. Imagine turning on the oven from work so that dinner is waiting when you get home or letting the maid in the front door while on relaxing at the beach. Connected homes are expected to make for a huge market. Sales of the technology are expected to pass $40 billion in the next five to seven years, according a Gene Munster, an analyst for Piper Jaffray.

Technology companies including Google, Intel and Cisco Systems are serious about capturing a piece of the market. So are telecommunications giants like AT&T, appliance manufacturers Honeywell and GE along with firms that install home security systems like ADT.

But the race is not just about selling fancy appliances. It’s also a fight for which company coordinates smart homes and collects data about the habits of those who live inside. Internet companies like Google are trying to learn as much as they can about consumers to better target them with advertising. Knowing what people do at home—whether they cook a lot or when they leave for their job—could add a new dimension to personalized ads beyond what can be learned from their use of desktop computers and smartphones.

Tony Fadell and Matt Rogers, two former Apple engineers, founded Nest in 2010 as a company focused on reinventing “unloved” household products. Their start-up had gained a strong following among Silicon Valley insiders, although it had yet to crack the mainstream market. With Google’s deep pockets, Nest will be able to more quickly expand product development and its international business. After Google takes over, Fadell will continue to run the business under the Nest brand. “With their support, Nest will be even better placed to build simple, thoughtful devices that make life easier at home, and that have a positive impact on the world,” Fadell said in a statement.

Nest, which is privately held, hasn’t disclosed its revenue or product roadmap. But its sales are suspected to be relatively small, and at least for now, insignificant to a company of Google’s size.

Privacy is a big concern with Google’s acquisition, especially with the breadth of information that Nest devices can collect. Nest’s thermostat uses sensors, historical settings and algorithms to infer when people come and go. To address privacy concerns, Nest said that its privacy policy limits the kind of personal information it will share with Google. But the past has shown that privacy policies can be tweaked and that customers can be asked to share information voluntarily so that it can be combined with data from other products.

Nest is not Google’s first foray into the connected home. But those efforts have failed to catch on. Google tried to recruit developers to use its Android software for controlling connected devices without much luck. It also announced plans to build a connected light bulb with a partner company, but nothing has so far been made public.

Google has left a bigger mark in hardware through its $13 billion acquisition of Motorola Mobility and the still experimental Google Glass, the Internet connected eyewear. Google also has also had some success with Chromecast, a device for connecting televisions to the Internet. Although companies have big hopes for the connected home, consumers are largely oblivious, analysts said. Relatively few know such devices exist and even fewer are willing to pay more to buy one.

“The largest barrier for the connected home is consumer awareness,” said Tom Kerber, a research director with Parks Associates. “The second barrier is the lack of a value proposition. Take a connected oven. You think, ‘What in the world do I need with that?’”

Complexity is another major hurdle. Setting up connected appliances and then operating them can be complicated. Companies are trying to create easy-to-use apps that serve as universal remote controls for all one’s appliances, but they still have a long way to go. For now, most devices are operated using individual apps, which is cumbersome.

Ross Rubin, an analyst with Reticle Research, said that Google makes a good home for Nest, which has focused on making its technology easy to use and more affordable. Full home automation systems by the major integrators can cost tens of thousands of dollars, plus monthly service fees. Nest’s smoke alarm, in contrast, costs $129 while its thermostat is $249. The challenge, he said, will be to make Nest more mainstream. “Today, Nest’s products appeal to tech savvy buyers who appreciate the functionality,” Rubin said. “They will have to work on more affordable products and new kinds of devices to reach more consumers.”

(MORE: Google’s plans to radically extend the human lifespan)

18 comments
shawnmagoon
shawnmagoon

Google paying huge amount for Nest is of no wonder as they thrive to enter into the field of home automation and mobile and system interfaced security systems. Home security systems are on great demand as it provides complete security in many ways which include security, surveillance cameras, intruder alarms, automated doors etc. Checking out the features of wireless home alarm http://www.alarmforce.com/home-security-and-video-relay/ system available in market we are bound to get maximum security. Google might have plans to be the market leaders in security systems also as they tend to take over Nest.

Bowen
Bowen

The security risk is a very valid and real one but it will be interesting to see how much these devices will be exploited. If a hacker wants to mess with you, or steal your identity they can do it but that isn't common, if someone wants to kill you, steal from you or mess with your stuff they can, relatively as easily with or without this technology. To "hack" into these devices to perform these same tasks still requires roughly the same amount of skill, just with these integrated devices and hacking in general instead of different skills like picking a lock. The real problem is the detachment it gives the would be ne'er- do-well, you feel a lot more detached about turning someones oven on from your home, far away than you do if your breaking into their house to do the same, in both cases you can leave their oven on, burn down their house and kill them but its a lot easier, morally, to do it from afar.
Still there is no stopping the forward march of progress, this technology will become popular, and widely used whether or not it becomes a security risk, which may eventually stop it, but probably too late, like asbestos.
As far as Google is concerned the best thing we can do is keep thinking of it as a good company so that when its founder die, fairly soon, and new leaders take charge they become what everybody thinks they are. Personally I like their mission to collect information, I just doubt they will last, after all absolute power corrupts absolutely. - From someone who is definitely not an expert.

Wisebutblind
Wisebutblind

We should not celebrate Googles relentless pursuits to be in everyones pocket, in everyones email, the gateway to everyones search, (and now) the determination to be in everyone's homes; we should be scared. 

They will become too powerful and too smart for the government to control. They already keystroke every entry through their servers, from emails to search engines and so on. Let's not be foolish and think their sole purpose is still advertisement.

Don't put all your eggs in one basket, cause you are not the one holding the basket anymore... 

brianlring
brianlring

Why is Nest worth $3.2B to Google?

#5 – Don’t forget – we’re in an era of mega-sized market caps – the 1% applies to market winners and losers too, so don’t get too worked up over the number. Of course it’s too much. Isn’t it always?

#4 – Convergence of Video Surveillance with Home Video. Surveillance cam tech is being used everywhere today in remote broadcast TV production. Dropcam has taken it to the home – Google/Nest can easily be a leader in that market, making a run for the current leader in the space, Alarm.com. (They’re probably a bit nervous at this announcement. Actually, Alarm.com does a better job of knowing when I am home or not because it uses my 3 motion detectors, not just the 1 attached to the thermostat.)

#3 – Rise of the next-gen gateway. The legacy ‘customer premise equipment’ or CPE companies like Motorola (now Google) and others do not have what it takes to build a great residential gateway product. Tony does. And this product is coming -- and strategic -- whether we like it or not.

#2 – Re-emergence of over-the-air TV in digital form. Witness Aereo’s success, and think, wait, if Nest can get people to install a thermostat, why not also an antenna on the roof? Then you’ve got the ability to deliver on Aereo’s value prop with very little effort and no court costs!

#1 – Last, but not least, you’ve probably seen Comcast, AT&T, and Tyco battling it out on TV ads in the home security biz – it’s like the new cola wars! The entire area is ripe for disruption and a bundle will be spent and lost in the coming years.

owen.iverson
owen.iverson

that video was the least informative thing i've ever watched in my life ever.  ever.

Mike_Arney
Mike_Arney

What separates Nest from other product or technology companies is its emphasis on human-oriented design. This is something we have been thinking about extensively at Continuum, a global design and innovation consultancy. As we get further into the “Internet of Things,” we will see increasing recognition that cutting-edge technology is only half the battle. The design of the technology has to meet us where we are as people and fit into our lives. Nest is the perfect example of the future of product design.  If you’re interested in hearing more on Nest, take a look at our blog post on the topic:  http://continuuminnovation.com/cutting-edge-technology-is-only-half-the-battle/

TAHKICT
TAHKICT

I agree with Wie… What about security threats from hackers? If they can rob Target they can rob your home.And the NSA will know how many times you farted by analyzing the increase of methane gas in your living quarters…:D

ibuywwii@gmail.com
ibuywwii@gmail.com

Google is amazing. For example if I search for WWII buyers, buyandsellwwii comes up on the first page. It puts people in touch with everything

sardire
sardire

“Google wants to be the connective tissue for all the devices and all the services in our lives,


There will be  major pushpack from other formidable players on this and I predict Google is going to slammed !

WienersPeener
WienersPeener

Awesome. Now hackers will be able to infiltrate and destroy the appliances in your home from the comfort of the third world.

zaglossus
zaglossus

Though obviously I use the internet and have two mobile digital devices, I really want to be left alone. The appliances and infrastructure in my house and car remain basically dumb (and private.)

zingoDingo
zingoDingo

Google are unspeakably evil. They've transmogrified from a brash bunch of know-it-alls into a hideous, data-devouring monster that makes Cthulhu look like a plush toy. Forget the NSA, the real danger here is Google and their ability to triangulate the googles of bits of data about each one of us into a digital entity that can be manipulated and, inevitably, scammed and violated. 


When I read about the phone wars, in which legions of Android devotees bemoan the idiocy and evil of Apple and Microsoft, I'm staggered by the insouciant blindness, or frothy enthusiasm, even, of a group of people lining up to be Google's free lunch. No one has the capacity to do more harm to persons than Google. We simply trust that they won't harm us any more than they already have. 


And, with all due respect to jnfarrell, who makes a factually correct but limited and unfortunately irrelevant assertion, "implicit coordination" works in this case until the exact moment Google decides it would, after all, like to use the data from those sensors. He should remember that implicit coordination has the effect of enforcing "social synchrony," and that in a business like Google's the most synchronous aim is profit. 


Simply awful. 

jnffarrell
jnffarrell

The internet of things are like Army Divisions within an armored corp. There can be constellations of sensors communicating within a tank, among tanks in a division and between divisions and supporting or reserve divisions. Not every sensor, or Google needs to see everything. Comm and command are designed to devolve and to fail safe. Its called implicit coordination, it works.


Judges and the technical ignorati do not understand implicit coordination, if they did they would not permit patent sharing to provide common doctrine, legal suits to provide common training and remotely operated trolls to provide plausible denial of coordination in violation of US antitrust law.

tyrone.m.jackson
tyrone.m.jackson

Unfortunately, these devices can all be infected with malware & used to spy on the owners and their networks, as the US Chamber of Commerce found out the hard way.

"Once hackers get in, it can be hard to get them out. In the case of a 2011 breach at the United States Chamber of Commerce, for instance, the trade group worked closely with the F.B.I. to seal its systems, according to chamber employees. But months later, the chamber discovered that Internet-connected devices — a thermostat in one of its corporate apartments and a printer in its offices — were still communicating with computers in China." from

http://www.nytimes.com/2013/01/31/technology/chinese-hackers-infiltrate-new-york-times-computers.html?pagewanted=all

jnffarrell
jnffarrell

Google is serious about encrypt everything. Signals too/from the internet of things can be encrypted by Nest, do their stuff in the constellation of home-things and never be revealed to Google as is consistent with Nests privacy policy. 


TimRobinsonAus
TimRobinsonAus

Nice rhetoric

Got any facts, evidence based trends or even market analyses??

I have opinions too, I just tend to not voice my support for lil green man till I can prove it

WienersPeener
WienersPeener

@zingoDingo I pretty much agree, but what choice do we have? I refuse to jump on the Apple bandwagon. So it's Android or nothing. For now at least...