Google acquires Nest: What does it mean?

Readers of this blog know that I’ve installed the Nest thermostats in my home and generally, I’m a supporter of the product.  My experiences have been documented in A Smarter Thermostat: Nest and The Nest Thermostat — User Experience.

Yesterday, Google announced that they are going to acquire Nest Labs for a tidy $3.2 billion (yes, that’s BILLION) in cash.  This is for a company that has two products, the Nest thermostat and the recent Nest Protect, a smoke and CO2 detector.   Here is the press announcement from Google.

So, what does that mean if you either use a Nest or plan to in the near future?  The purpose of this post is to provide my opinions on this and some background  as to what happens when a very large fish swallows a much smaller fish.

First and foremost, for users of the products or folks planning to install them, this announcement should not change anything.  If anything, it’s good news.  The announcement indicates that the management team (and hopefully brain trust) will remain in place once the deal closes later this year.   The way to read this is: “For at least one year after the deal closes.”  When a deal of this sort occurs, the principals are usually locked in for 12 months to help facilitate continuity as the smaller company gets integrated into the larger.  Sometimes, the smaller company runs as a standalone company for a long time (e.g., Lotus when it acquired by IBM).   Normally, once the year is up, the acquired company gets fully integrated and  its stand-alone identity fades quickly, though its brands like “Nest” may remain if valuable.

So, why is Google acquiring Nest?  There are several reasons for one technology company to acquire a smaller one.  So, let’s examine each reason in turn:

Intellectual Property (IP) and brain trust — This is probably the most common reason for acquisition.  Large tech companies typically market themselves as cutting-edge innovators, but frankly that’s not really true.  They might have been at one time and Google certainly has worked to remain cutting-edge, however being cutting-edge is usually a bad business approach.  The fact is that large companies prefer to watch others (typically startups) do the innovation.  Most fail and sometimes it can take a long time for a new technology to achieve enough traction to show real promise.

The Nest products and what they represent is a good case study.  The idea of home intelligence has been on the cusp of a breakthrough for many years.  The conventional wisdom has been  that the lack of a common communication standard was the principal barrier.  What Nest has shown is that the real underlying protocols are sufficient, were integration can occur in the Cloud.  They have also shown that there is a real market for this type of integration.  It’s reported that they are now shipping between 40-50,000 thermostats per month.  A year ago, when I first wrote about them, hardly anyone knew about them.  That’s for a “luxury” product at $250/device.   This means that Nest Labs is a perfect acquisition target: Fat and juicy, with much of the early-mover  risks reduced.

I’m thinking that this is the primary reason for the acquisition.  Due to this and the fact that Google is still seen as a great place to work, they will be able retain most of their brain trust, though a few will prefer to find and/or start another company.

Key employees — This is related to the previous, but its important to call it out separately, especially in this case.  Occasionally, one purchases a company to acquire one or two critical people.  When Next was acquired by Apple, they were acquiring Apple’s founder Steven Jobs, though they did integrate some of the Next software into MacOS. By this acquisition, Google is acquiring design expertise.  They are getting Tony Fadell and Matt Rogers.  Between them, they have been involved in the design of the initial iPod as well as much of the software in the iPods and early iPhones.   One has to believe that the duo has  brought some talented designers to Nest from Apple.

So, Google is beefing up their design capabilities with this acquisition.  So, what’s to keep them at Google?  First and foremost, I doubt that Google would have paid $3.2B without some pretty strong incentives for these key employees to stay put.  However, to get the hearts of this talent, I suspect they will be integral to Google’s home intelligence efforts and possibly wider design efforts.  I wouldn’t be surprised to see Tony or Matt take a much larger role in Google’s core design efforts.

Complimentary or competitive products — Frequently, acquisitions occur when the opposing products either compliment each other or are competitive threats.  In the latter, the (hopefully) weaker products will be end-of-lifed or possibly integrated into the stronger.  For Google, this is the former, they haven’t yet made a bet on home intelligence, though they do have the base technology with the Android platform.

Strong sales channels and customer list — Another reason to acquire a company is to acquire the customer list and/or sales channels of the acquired company.  This is fair more common that is advertised.  However, in this case, I don’t see this to be a significant reason for Google, since they probably already have most of the customers that Nest has.  They do get some bump with the existing Nest channels of the Apple stores, Lowes and Home Depot, but not $3.2B worth.

So, What what is the prognosis?

I think this is a great move for both Google and Nest Labs.  For Google, they beef up their design capabilities, as well as to get the base products for an aggressive move into home intelligence.   If managed well, Nest could give Google a real leg up on a more integrated set of smart consumer products.  This is a rich, largely untapped market.  There are a number of huge bets being made here by companies as diverse as Honeywell, Verizon and LG.

For Nest Labs, yes, its a large payday.  But the real benefit is the cover and resources of a cash rich company.  I suspect that Nest was reaching that point where it was going to get more and more difficult to continue innovating and staying solvent without a big daddy like Google.  There are some significant lawsuits pending against Nest Labs by Honeywell, BRK Brands (maker of First Alert smoke detectors) and Allure Energy over alleged patent infringements.  Even if these suits are without merit, they could be a huge and potentially crippling drain on a small company.   Google really changes the equation here, both in the available cash to fight as well as the balance of their own patent portfolio.  See my posts Musings on Software Patents and Updates on Software Patents for why this acquisition changes the game.

I believe the consumer wins for two reasons.  First, this insures that the Nest products will continue to be enhanced and supported for a long time.  Second, over time we should see additional products that integrate nicely into the Nest environment and management platform like locks, lighting and appliances.

What I don’t think will survive is the Nest brand identity.  Somehow it will morph into Google and/or Android.  However, who cares as long as the product continue to delight their customers.

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