Why Google Bought Nest for $3.2 Billion

by Tanya Bodell, Energyzt

Google has paid $3.2 billion for Nest Labs, the innovative creator of the self-learning thermostat and smoke detector. The power sector is aghast and bedazzled, with most simply trying to figure out why the Internet behemoth would pay so much for a startup founded in 2010. Taking into account the team, technology and market, Google might have underpaid.

Team: Former Apple Engineers

Tony Fadell, Matt Rogers and their team. Enough said, for those in the technology industry.

For those who require further elaboration, many members of the Nest team worked on Apple’s revolutionary iPod, iPad and iPhone. Fadell, co-founder and CEO, has received acclaim as one of Business Insider’s Top 75 Designers in Technology, Fast Company’s 100 Most Creative People, and CNBC’s Top 50 Disruptors. Analysts surmise that the Nest team will become the core hardware group at Google, replacing the Motorola Mobility team that Google just sold to Lenovo. Despite the divestiture, Google retains more than 17,000 former Motorola patents, of which more than 10,000 relate to mobile communications.

If you owned numerous patents in mobile communications and could acquire a subset of the Apple design team to work with those ideas, how much would you pay?

Technology: The Most Disruptive Design ” Ever

Fadell and Rogers teamed up to redesign the traditional thermostat and created an innovative sensation. The Nest home thermostat with its sleek packaging, easy instructions and cool mobile app that allows you to check and change the temperature away from the home made energy efficiency cool. Protect, the smoke alarm developed by Nest Labs, also remedies many of the long-standing annoyances associated with shrill beeps that refuse to turn off after you burn toast.

But these are only the start of what could be a long line of self-learning, mobile-controlled, app-oriented, energy efficiency vehicles already parked in the home and begging for a 21st-century redesign. Imagine self-learning potential on refrigerators, dishwashers, washers and dryers, water heaters, lighting controls and electronics, which combined with climate control use 92 percent of the energy required by the average household. If Google can achieve the same level of energy reduction in these applications as it did with a thermostat, utilities could be facing an additional 10 to 20 percent reduction in load. Add to this mix the commercialization of electric vehicles, distributed generation and fuel cells, and Google just bought itself a revenue stream destined for growth well into the future.

If Google can figure out how to incorporate ads into the privacy of your home via services offered by these appliances, it wouldn’t be the first time.

Market: The Trend is Google’s Friend

Google likes to be ahead of the next wave, and Nest epitomizes a recent surge toward energy efficiency and demand response. State and federal subsidies have shifted to encourage such investments, as illustrated by Secretary of Energy Ernest Moniz’s emphasis on energy efficiency in his first speech upon taking office last year. The Nest thermostat already receives sizable rebates from utilities that are willing to partner with Nest Labs.

Traditional players and business models for behind-the-meter energy controls also are changing. Telephone, cable and home security companies have developed energy efficiency offerings within the past three years. The new “quad play” adds wireless services to cable, telephone and Internet, opening up an endless potential for apps focused on home energy control. Given Google’s pre-eminent position in the Internet, telephony via Google Hangouts and Google Voice, plus the ability to stream movies, television shows and content on laptops, it would make sense that it, too, should move into the fourth dimension.

Watt’s Next?

The buzz around the purchase of Nest Labs is reminiscent of the same cacophony surrounding Google’s 2006 purchase of the then-less than two-year-old social media startup YouTube for $1.65 billion. And similar to the YouTube investment, Google has people scratching their heads trying to understand the synergies. Yet, Google and other software titans have been dabbling in the power sector for the past 10 years, not quite finding the right runway for their investments to take off. If there is an opportunity that provides such a platform, this could be it.


Tanya Bodell is the executive director of Energyzt, a global collaboration of energy experts who create value for investors in energy through actionable insights. Visit www.energyzt.com. Reach Bodell at tanya.bodell@energyzt.com or 617-416-0651.

 “” I’m betting that there’s a lot of cool stuff we could do together, but nothing to share today.” — Google co-founder Matt Rogers

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