Why Google Just Paid $3 Billion for a Thermostat Company

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By Seth Fiegerman2014-01-14 09:46:19 +1000

It has been a couple years since Google announced a multi-billion dollar acquisition that caused peoples' jaws to drop. On Monday, the company did just that with the news that it had entered into an agreement to buy Nest, which makes smart thermostats and smoke detectors, for $3.2 billion in cash.

On Twitter, some users reacted by joking about the possibility of Google requiring a Google+ account to use Nest products or introducing thermostat ads. These and other reactions showed a genuine concern that Google might somehow mess up Nest, a common enough concern with any acquisition. There was also a sense of confusion about what a search company wants with a thermostat maker.

In a brief statement about the acquisition, Google's CEO Larry Page stayed vague, but alluded to one possible incentive for the acquisition: "We are excited to bring great experiences to more homes in more countries and fulfill their dreams!”

See also: Google in 2014: The World Is (Almost) Its Oyster

The key word in that sentence is "homes."

Google has tested and introduced several notable household products over the years, including its own version of a smart thermostat as well as products like Google TV. To date, it hasn't had the best luck.

"Google didn't have anything in the home outside of Chromecast. Google TV has not been successful and Chromecast is just getting started," Frank Gillett, an analyst with Forrester, told Mashable. "Nest quickly gives them something they can point to and say, 'Look, we have these amazingly powerful things in the home."

He added: "Nest is a vision for what Google in the home could look like."

Nest is perhaps the best known of a growing number of startups who are betting on strong demand for Internet-connected household devices. Some researchers have suggested that this isn't just a multi-billion dollar opportunity; it's a multi-trillion dollar opportunity.

Aside from any revenue Google might gain from sales of Nest products directly, these devices potentially provide Google with more data and insight into user habits at home and, just as importantly, create a more robust device ecosystem — something Apple has always excelled at — which may make each one more desirable than it would be in isolation.

As Gillett puts it, Nest's tools help to "amplify the importance and power of Google services to take care of mundane things like making sure the doors are locked, or did the kids get in after school." It might even help translate into gains with Google's entertainment offerings, though probably not for some time.

"I would expect it will eventually touch the entertainment [side]," Gillett said, offer the example: "You want the TV to know to mute at the right time."

As an added benefit, the acquisition also helps Google bring hundreds of talented employees into its organization. Many of these employees previously worked at Apple, including Nest's founder and CEO Tony Fadell, who is credited with being one of the main designers of the iPod.

While the Nest acquisition is a significant bet for Google, it's worth putting in context. Google had more than $56 billion in cash and marketable securities as of the end of the third quarter of last year, which means this $3.2 billion deal accounts for just more than 5% of the company's cash on hand.

Image: Nest

Topics: Business, Nest, Tony Fadell