Google enters connected home market with Nest Labs takeover

Wednesday 15 January 2014 | 14:05 CET | Market Commentary

Google has acquired the company Nest Labs for USD 3.2 billion. Nest Labs makes two connected devices, a thermostaat (USD 250) and a smoke alarm (USD 130), both of which can be controlled via an iOS or Android app and Wi-Fi. Nest Labs, which counts around 300 employees, will continue as an independent company within Google. 

Google invested earlier in Nest Labs through its Google Ventures arm; the other shareholders were private equity investors. They reportedly invested up to USD 230 million in Nest Labs. The founders of Nest Labs came from Apple, and one of them was among the initial creators of the iPod. 

With the acquisition, Google enters the home automation and M2M market, also referred to as the 'Internet of Things', or as Cisco calls it, the 'internet of everything'. This involves a convergence of hardware, software, telecom and advertising. Given Nest Labs' sales of around USD 100 million per year (according to American media), the price tag appears high. Google earlier tried to develop itself a similar app (PowerMeter) and was also rumoured to be considering a 'smart thermostat'. It clearly considers this market worth a big investment.

The acquisition shows there are few areas that escape Google's reach. Search and search-related advertising were the core activity from the start, but Android, YouTube (both the result of takeovers) and Chrome are also increasingly core activities. Beyond that, the company focuses on the social, e-commerce and enterprise markets, but the full range of activities extends much further, from automation to genetics, robotics and space technology. Using software and hardware, Google is trying to do nothing less than solve the world's problems, whether they be big or small.

Its hardware portfolio is growing quickly. Computers, laptops and smartphones are made to spec by Samsung, HTC, Asus, HP, LG, Acer and Lenovo and of course, Google's own Motorola. Google also makes a USB dongle for TVs (Chromecast) and glasses (Google Glass) and is rumoured to be developing a smartwatch and a set-top box. In addition, it's active in the auto (connected car) and home automation sectors. For the latter, it appears likely that Nest Labs will provide a way to control home appliances. The cooperation between Google and Nest Labs could also lead to a remotely controlled set-top box.

The question is how will Google make money from Nest Labs. Initially, the company will just continue its activities and sell consumer hardware, the same as with Motorola. In Google's reporting, a new category will be created: Google business (92% of revenues), Motorola business (8%) and now Nest Labs business (sales unknown). In future, Google can explore the use of the thermostats and smoke alarms. These should provide a trove of information on how users interact with the devices and associated apps. For the moment though it's unclear whether this information can be shared with Google to be used for example in targeted advertising, given the potential privacy issues. 

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