Last week, Nest was acquired by Google for $3.2 billion.
There are only a few companies that have truly excited me in the last few years, and Nest is at the top. They worked on a very original, very real problem—thermostats were not only a user interface disaster and something nearly everyone hated to use, but also were an opportunity to do something meaningful: use energy more efficiently in people’s homes while also improving their relation with an important but ignored device. In addition, it clearly was the first product in a much larger plan. And it was a very good first step in a very good plan.
So, when I heard that Nest had sold to Google, I felt a pang of disappointment. Not because it was Google (which, if Nest were to be acquired, makes more sense than any other company I can think of), but rather because Nest is an incredibly ambitious company that, I think, had the opportunity to be as important to the next wave of development in personal computing and the Internet as Apple and Google were—and potentially as large. They were a key member in Silicon Valley’s next generation of meaningful companies, I thought.
Of course, nearly every bit of that can (and will) still be true, with the notable exception of remaining independent. They can still do all of that, but they will do so under Google’s banner, and for Google’s benefit. And that’s fine, all else being equal. Before I continue, though, we need to discuss why Nest decided to sell in the first place, and “for the money” doesn’t count, because I know Tony Fadell, Matt Rogers and everyone else there didn’t do it for the cash.
I was spending nearly ninety percent of my time on building the infrastructure of the company and I wasn’t able to spend enough time and cycles on what I love doing: products and creating differentiated experiences for our customers. That is where my love is and Google offered to let us focus on that, but with scale that will help bring our horizon closer to us, faster. Google offers to bring that scale to us. For me, ultimately building great products is key.
Fadell cites European distribution as a specific example of what he means by “scale”—physical distribution and dealing with legal issues surrounding something as regulated and disparate as energy. Fadell wants to focus his time on developing products rather than handling all the issues surrounding it.
It’s hard to argue with that. Nest clearly wants to move quickly. The Nest thermostat is a shockingly good first product, and Nest Protect—which they released just two years later—is at least as good. Nest Protect also began revealing their larger strategy. Owning either one of them is great, but owning both of them makes each one better. Since they use your home’s wireless network, the Nest thermostat will automatically augment itself with the Protect’s motion sensors. And more importantly, if the Protect senses rising levels of carbon monoxide, the thermostat will shut off your home’s furnace. Their strategy, then, appears to be modular devices that are convincing on their own, but when used together not only all function better, but begin to form the basis for a connected home.
Being a part of Google will allow them to realize that strategy faster by increasing their resources so they can focus their bandwidth on developing product. Google also is doing industry-leading work in learning systems and web services, which obviously will benefit Nest. Like I said, of all the companies in the world that could have acquired Nest (which, admittedly, is a fairly short list), Google is the best fit.
But Google didn’t agree to acquire Nest entirely for Nest’s benefit. They did it, I assume, because Nest fills in particularly important holes in Google’s capabilities and in Google’s future development. While Google has been very good at building web applications, web services and a mobile operating system, they’ve done very little to prove that they can design and make hardware that real consumers will pay real money for. There’s a lot more involved there than design and supply chain. To a much greater extent, making hardware involves doing businessy things like identifying a target market for it, identifying what price they’ll pay at necessary levels of sales and margin, and then manufacturing a quality product in an efficient enough way to hit that margin. Nest has shown that not only can they do all of that, but they can produce an exceptional product that customers truly love. That’s invaluable, and it’s something Google hasn’t done.
Nest also provides an entry path for Google into the home. Starting into the connected home requires building hardware, and it requires a no-bullshit vision for how the connected home can improve people’s lives in substantive ways. Nest provides both of those things.
It sounds a symbiotic relationship, then. Google can provide Nest what it needs and Nest can provide Google something it needs, too. In Nest’s ideal vision of the relationship, Nest will remain largely independent—their own brand, leadership, teams and products. People and resources may flow across the Nest-Google boundary, but the two entities will nevertheless remain distinct. But in Google’s, Nest will begin to overlap and merge with Google itself. If Google wants the Nest acquisition to result in an improved capability for creating hardware products that consumers really want, then that necessarily requires Nest’s leadership to extend outside of Nest itself—which would require splitting their time, too. This is because while Nest may become functionally a discrete unit within Google (the “connected home” unit, let’s say), if it is to have any effect on the rest of Google, there has to be some sort of cross over. This may mean putting Nest’s leadership (whether that’s Matt Rogers, or another member of the team) in charge of Google’s hardware, or even having people in leadership roles move back and forth across the boundary. In any case, the boundary begins to smear, and Fadell’s reason for doing the deal—to focus his team’s time exclusively on product—begins to seem less likely.
Of course, that’s not necessarily negative. Perhaps a Nest-infused Google, and a Google-infused Nest, is better for everyone involved—Nest, Google, and us. I think there’s a good argument to be made there. But inherently, as that occurs, Nest begins to fade as a distinct entity, and it becomes more Google.
I think the most optimistic comparison for this acquisition is Disney’s 2006 acquisition of Pixar. Pixar remained an independent studio, kept their leadership, kept their campus, kept their culture, and created some of their most artistically and commercial films afterward. In return, Disney received Ed Catmull and John Lasseter’s services for turning around their declining animation department. And turn it around they did; Disney Animation Studios is enjoying something of a renaissance. Frozen, released in December 2013, was Disney’s biggest hit since The Lion King. The Pixar acquisition is one of the most successful acquisitions in history.
That could be how it works out here, too. I suspect, though, that while Pixar has thus far been able to retain its independence, Nest will not retain independence to the same extent. I have two main reasons for thinking so. First, the Disney-Pixar deal was incredibly specific in its intent: the deal was Catmull and Lasseter would oversee Disney Animation and Pixar would remain its own studio. The Google-Nest deal, as far as I can tell, doesn’t appear to be nearly as well-defined. As a result, blurring will happen with relative ease. Second, while in the movie business it’s actually beneficial for Pixar to remain independent in substance and in brand—it allows them to experiment in ways they couldn’t necessarily do if it was all a single studio, and it also allows them to release multiple movies per year in a way that doesn’t feel like Disney movies are competing for people’s attention—that structure doesn’t make nearly as much sense for Google and Nest. In reality, centralizing their hardware operation makes much more sense than continuing Nest as a parallel operation to Google’s other hardware operations. As a result, I think what we are more likely to see is Nest more or less become a part of Google while the brand continues on as Google’s “connected home” brand.
In the short-term, then, I think there’s very good reason to be excited about the deal. I bet we are going to see even more incredible things come out of Nest than we would have seen otherwise, and probably faster as well. But long-term, I’m disappointed. Nest is one of those rare companies that identified a brilliant product idea, in a large market, that would allow them to develop into something much greater in the future. And along the way, they built a first-rate company in all areas. I believe Nest would be one of the most important companies in the world for the next twenty years. And while they may still be integral to personal computing and the web’s future, it will likely be under Google’s banner. For better or for worse.