Who'd pay $3.2 billion for a smoke alarm? Google would!

Profile picture for user slauchlan By Stuart Lauchlan January 13, 2014
Summary:
Google's planned $3.2 billion takeover of Nest Labs is an Internet of Things gambit to drive further and further into the consumer home.

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"Google paid $3.2 billion for a smoke alarm?"

The incredulity in the voice of a friend of mine yesterday was tangible. He is a ‘civilian’ of course and as such unversed in the vagaries of tech market valuation stakes.

But still, when you say it loud, it does sound like a hell of a lot of money for a company - Nest - that is essentially famous for a thermostat and a smoke alarm - albeit a very clever thermostat and smoke alarm.

Of course there’s  considerably more to it than that. This is an Internet of Things (IoT) gambit by Google and one that could pay back incredibly lucratively as the firm strives to push further and further into our homes.

Last week’s Consumer Electronics Show (CES)  in Las Vegas was heavy on the IoT as a cursory glance at any of the media coverage from the event will confirm.

The Smart Onesie, the Smart Crock Pot, the Smart Toilet - suddenly Marc Benioff’s smart toothbrush doesn’t seem quite so unusual.

The IoT market space is one that promises rich pickings with any number of ‘think of a number’ predictions being bandied around. Take your pick: according to McKinsey, IoT applications could have an economic impact of between $14 trillion and $33 trillion a year by 2025 while Gartner’s being remarkably conservative by going for total economic impact of $1.9 trillion by 2020.

At CES last week, Cisco CEO John Chambers reckoned that the “Internet of Everything” will be “bigger than anything that’s ever been done in high tech” with $19 trillion in new revenues by 2020.

Who to believe?

You pays your money and takes your choice of course, but the one thing everyone agrees on is there are big returns to be had out there.

So paying $3.2 billion for Nest in order to get a jump start over Apple and Microsoft can be read as a pretty savvy move on Google’s part, especially as this is still an incredibly immature sector with everything to play for in terms of mindshare as well as marketshare.

While the line up at the CES show would have us believe that a mainstream Smart-everything is just around the corner, the likes of Forrester Research take a more realistic approach, finding that in a recent survey 53% of respondents in the US expressed no interest in smartphone-controlled appliances, for example.

But then once upon a time nobody was interested in taking photos on a phone.

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Everything has its critical inflection point and while Forrester’s probably right that the consumer IoT’s is still some way off, it’s time for those with ambition to succeed in this space to put their stake in the ground.

What do you get for $3.2 billion these days?

So what is Google getting for its $3.2 billion? Well, for starters, it’s getting Tony Fadell and Matt Rogers, the two guys who set up Nest Labs back in 2010.

Both are Apple alumni, Fadell having worked on the original iPod concept and design while Rogers was responsible for iPod software development.

Nest’s two products are its smoke alarm and its smart thermostat, both only available at present in the US. Both devices can be accessed and managed remotely using a smartphone.

The alarm can advise users on how to respond to alerts and emergencies such as a potentially lethal carbon monoxide buildup or a full-blown fire. It can even get in touch with the fire brigade for you.

Meanwhile the thermostat is designed to learn how you prefer their home to be heated and cooled, using temperature, humidity, activity and light sensors to know whether the building is occupied or not and adjusting the temperature accordingly.

So why sell to Google? Fadell told the Financial Times that it’s because he and Rogers want to be able to focus on product innovation and not the infrastructure issues that inevitably come with growing a business:

“The more we kept starting to grow and scale, we spent 80 per cent of our time worrying about infrastructure and 20 per cent of our time worrying about roadmap and products. We woke up this world – everyone wanted to be the “Nest of blah”.

“I want to focus on products and customers, we don’t want to be building infrastructure. It was easy for us to raise tonnes of money but money doesn’t equal infrastructure. I was hamstrung.”

The theory then is that by handing over all that hassle to Google, he and Rogers can get on with the bigger picture stuff that they really want to do. In a blog post Fadell confirmed:

In a blog post Fadell added

Google will help us fully realize our vision of the conscious home and allow us to change the world faster than we ever could if we continued to go it alone. We’ve had great momentum, but this is a rocket ship.

Google has the business resources, global scale and platform reach to accelerate Nest growth across hardware, software and services for the home globally.

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He was quick to add that this isn’t something that’s come about just because Google flashed a big check in his direction and that for 75% of Nest’s existence Google has been involved somewhere:

My first meeting with Google as a Nest-er was before we’d launched. At the 2011 TED Conference, Erik Charlton and I huddled in a corner with Sergey Brin to show him a video and an early model of the Nest Learning Thermostat – he instantly got what we were doing and so did the rest of the Google team when we showed them. In May 2011, Google Ventures led our Series B round of financing, and in 2012, Series C.

Time and time again, Googlers have shown themselves to be incredibly like-minded, supportive and as big of dreamers as we are. I know that joining Google will be an easy transition because we’re partnering with a company that gets what we do and who we are at Nest –and wants us to stay that way.

That last bit’s important - and a claim that will be tracked closely in the coming years.

The message is that the Nest team will be left to their own (smart) devices and to set essentially their own agenda. From this hands-off approach, Google hopes to see great progress.

Verdict

While Google’s dabbling in hardware to date hasn’t exactly set the world on fire - Nexus or iPad, you choose! - it continues to make some bold investment decisions.

Nest follows its acquisition of military robot-maker Boston Dynamics last month and of human-gesture recognition start-up Flutter in October.

But it’s the Internet of Things where the real action could be found - and for a company like Google, the appeal goes beyond the devices themselves and into the data that’s associated with them.

This of course could be the interesting rogue factor.

Even if Forrester is wrong and there is more enthusiasm for a house run by smart devices than there seems to be at the moment, will consumers be entirely comfortable with Google knowing even more about them and their daily habits than it currently does?

But overall another investment in a world where Google is so much more than just a search engine.