Posted by: Dr Churchill | January 14, 2014

Nest

Google has announced it is buying Nest Labs, maker of smart thermostats and smoke alarms, for $3.2 billion in cash. At times like this, it’s normal to ask what is in it for each side.

Here is the Gives and the Gets for each side and the biggest win is for Innovation and Start Up company formation. This time, the particularly interesting question is Innovation of Understanding Human Behaviour and Choices. And this Innovation is crucial in this M&A deal for what it says about our world.

Google, gets: A great company full of engineers who understand lots of things it can use in business units, like homes, offices, phones and self-driving cars. As more devices become connected to the Internet, Google is increasingly interested in those devices, much the way Google built the Chrome browser when the Internet was mostly limited to desktop computers. So now the Google divisions that can benefit from this M&A tran, are about all. Yes ALL of Google benefits from this smart acquisition. So this is money well spent. Because in whatever form, Google is about understanding. And in this case understanding the connected device, and how people work with it, is a big part of understanding overall behavior, and that is Google’s overarching driving ambition.

Google also has about $56.5 billion in cash, so Nest isn’t that much of a drain. Pile it up too much, in fact, and the shareholders may start asking for it back. Better to spend on perhaps the most valuable asset of our time: a better understanding of human behavior, in all its forms, and a valuable asset that will keep appreciating for the foreseeable future. Proof of this is the climb in Google’s share value since the announcement of the deal. A Win-Win for all. The ecosystem is better because of this and we are all better off as well.

And what does Nest get? A shitload of cash – to start with. All the Angels, First Rounders, and VCs involved in this transaction are right about now signing Hallelujah. We are grateful. And the founders are rich beyond compare now, because rather than the usual start-up founders, made suddenly rich after an acquisition, Nest’s Tony Fadell and Matt Rogers are both Apple veterans who had made decent fortunes before they started Nest. This M&A transaction of course never was about the money — though in various funding rounds Nest has probably raised less than one-tenth of what Google is now paying, including the funding from Google’s investment arm.

What Nest though is really getting is security.  Google is a like-minded corporate parent with lots of muscle. Both businesses are based on algorithms, which Google knows how to write better than anyone else the world over. Also, Nest’s competitors are very large multinational companies. Even a start-up as clever as Nest might not have been able to outlast those giants, but Google can. Unlike other start-ups, like Snapchat, which turned down its own multibillion-dollar acquisition offer from Facebook, Nest very likely needs that corporate girth to grow.

Rather than thermostats, Nest’s key technologies were described by Mr. Fadell in an interview last November as “communications, algorithms, sensors and user experience, running over a network to the cloud.”

That is, Nest is interested in how people behave inside their houses; the thermostat was just the first step to understanding that. Its sensors gave information about interactions; after that, algorithms on everything from user preferences to battery power were deployed to give people a sense of control they had not had before.

And as Mr. Fadell put it at the time, “we’re focused on experience.”

This is the type of Innovation that really ROCKS

Yours,

Pano

PS:

By the way, Nest did all of it on Amazon Web Services. It will be interesting to see how quickly Google can put all this on Compute Engine — its public cloud.

Nest, along with Snapchat, which already runs on Google, would be among its marquee customers.


Responses

  1. Reblogged this on Bleeding Edge Blog.


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