Sat 25 January 2014

What Happened?

Google bought Nest Labs, maker of Nest Thermostat and Nest Protect, for $3.2 billion in cash last week.

Nest Thermostat controls temperature without a need for manual intervention and promises to save up to 20% off heating bills. Nest Protect removes annoyances from traditional smoke alarms and adds a few useful features such as audio alerts to replace the annoying beeps. The products received multiple design awards and garnered a lot of attention and good reviews.

That Google bought a company in smart home device market and then the amount that Google paid, ten times Nest’s annual revenue, took the technology community by surprise and quite a few responded with a healthy amount of apprehension.

One needs to create an online account to manage Nest’s devices. This allows users to control their devices using their smartphones and through a browser. Data that each device reads is stored with Nest. This could be details such as your physical location, time you leave home and you return, which room in your house do you spend your time etc.

Therefore, the discussions surrounded around how Google is going to use this data that Nest has on its users.

Internet Of Things

Remember the refrigerator that orders eggs from super market as soon as you are out of them? Technology industry has been teasing about smart and connected devices such as these since the 90s. But the technology only evolved recently to enable us build such devices. Nest devices belong to this category that the press loves to refer to as the Internet of Things.

Just as any device that is frequently used by a user such as a phone or a computer, these devices provide a tonne of information about their users. E.g.: How many rooms does your home have? What is your preferred temperature? Do you have kids? How many people live in your home? This is lots of very specific information tied to a person or a set of people.

This market is only expected to explode because of the benefits such as convenience, savings etc it provides to the users.

Google's Business

Google by its own admission is in the business of organising world’s information and make it universally accessible. This information resides mostly on the ‘internet’ - as we know it and on our mobile phones. Google has a significant presence on today’s internet whether it’s search, email, the websites you visit (through ads, analytics), your schedule (Calendar), who you know (Contacts), what you watch (Youtube), where you go (Phone, Maps) etc.

If the future of internet is the ‘Internet of Things’, then it obviously makes sense for Google to be present there too, where most users’ information is going to reside in the future.

What Does Google Get Out Of Nest?

The acquisition is definitely not for technology as the technology behind Nest devices is not exactly radical. The devices program automatically, are web accessible and add a bunch of useful and thoughtful features.

Nest allows Google to enter this nascent but promising ‘Internet of Things’ market with a set of products which already proved to be reasonably successful and loved by most users.

The two main people behind Nest - Tony Fadell and Matt Rogers will help Google build new products in the market. I believe Tony when he said during his recent interviews that this acquisition allows him to (1) focus on what is dear to him - creating such new devices and (2) let google worry about operations and distribution to new geographies and markets.

This makes so much sense for Google. It can put an army of salespeople and penny pinchers to make this business more profitable and scalable.

Google’s primary purpose however, is to have a major presence in this market and to have this information accessible to itself. Imagine the amount of information Google will have in the future on its users! If this is the future of internet, Google is already building a big moat around it.

What Does Nest Get Out Of This?

The question instead should be what Tony and Matt get out of this. Unless there is some sort of revenue sharing deal from future products, $3.2 billion in cash is the value that Tony and Matt placed on the future products they are going to create while they are employed by Google.

Given how much Google is going to benefit out of this by having a presence in this highly plausible future, $3.2 billion in cash doesn’t seem like a huge amount, given that Google has $50+ billion in cash reserves.

Privacy Implications

If you are already comfortable using Google’s services, there’s nothing new that you need to worry about. They know more about you than you do.

But if you are at least remotely bothered by Google’s chairman Eric Schmidt’s response for a question a few years back about if people can trust Google with their information (“If you have something that you don't want anyone to know, maybe you shouldn't be doing it in the first place”), and you are an existing or potential customer of Nest, then you have a lot to worry about.

While FAQ posted by Nest only assures you in ‘lawyer-speak’, additional clarifications later by Tony Fadell have not exactly been reassuring.

Irrespective of what Nest says, you can safely assume that this data is going to be integrated with Google’s other information on you sooner or later. Given Google’s business model, there is no reason to believe otherwise.

Your phone only reveals your physical location and movements throughout the day, compared to your PC for example. But these kind of products provide information about the surroundings and habitats a person inhabits. Maybe there is a reason or two to worry about.

If This Didn't Happen

If this acquisition did not happen, Nest would have grown slowly than it could possibly grow now. However, if we believe the industry talk that the margins on their products are low, it would have forced them to innovate to create new revenue streams from existing products. Maybe it will still happen, maybe it won’t. At least we know, they don’t have to.

Outright buy makes sense for Google instead of an alliance, because this would give Google exclusive access to the people behind this company and any future products in development.

Maybe $3.2 billion was too much to resist, even for guys like Tony and Matt.