Is Google finally fleeing the Nest?

Written by on June 8, 2016 in Guest Blog with 0 Comments

bird-nestGoogle’s $3.2bn acquisition of smart thermostat maker Nest in 2014 was meant to be the centerpiece of its connected home strategy, but it has been beset by problems and increasingly sidelined. Now the head of Nest Labs, Tony Fadell, is stepping down, to be replaced immediately by Marwan Fawaz.

The appointment of Fawaz is a clear indicator of Google’s new device strategy. No more semi-autonomous units like Nest – there have been persistent reports of troubled relationships and clashes between Nest and Google teams. Now, all hardware efforts will be integrated across the company under the direction of recently appointed Rick Osterloh. Both Osterloh and Fawaz were executives at Motorola Mobility when Google acquired it, and have been lured back after the sale of Motorola to Lenovo.

This sees Google building a more unified and well controlled team and tapping into the skills of Motorola even now it has offloaded the actual products. Nest, it seems, will have a very subordinate role in this strategy, though whatever happens to its gadgets, it will have contributed significantly to Google’s smart home ambitions by bringing the Thread connectivity technology into the fold. The Thread Alliance is now pushing this as a standard in preference to Bluetooth LE or ZigBee.

As with Motorola, Google may be extracting the best ideas and technologies from Nest while defocusing on its actual devices, or at least accepting that a smart thermostat, however elegant, is no basis for a whole smart home platform within a multi-billion dollar group.

The reorganization which created the Alphabet holding company gave Nest considerable autonomy to generate new ideas, but divorced it from the main Google operation, which sells the actual products and services. Google has now focused its home and device strategies elsewhere. This was clearly demonstrated with the appointment of Osterloh to head up a brand new hardware strategy with greater integration of efforts across the group; and again at the I/O conference, when the launch of the new Google Home product placed Nest in the shadows again.

Many reports indicate the failure of many of Google’s ambitions for Nest. Nest was acquired for $3.2bn, bought Dropcam’s home cameras for $555m, paid out around $300m for Revolv’s smart home hub, and has apparently generated very little return on all that investment so far. When Nest’s 2015 earnings were leaked to Recode, it showed sales of only $340m, and Greg Duffy, the head of Dropcam, claimed to have delivered the bulk of that.

Google may have hoped that Fadell would be its Jonny Ive (he was part of the iPhone design team at Apple), the man to transform its humdrum hardware design record and create beautiful objects to drive its web services into every home. If so, Fadell was not the right man.

When Alphabet was created, Nest became part of that umbrella structure, in which semi-independent businesses can run under their own CEOs without having to be part of the Google machine. In theory this should encourage innovation and independent thinking, but in two cases already – the Boston Dynamics robotics acquisition and Nest – the semi-detached structure has hit problems.

In early 2015, Fadell took responsibility for hardware projects beyond Nest, such as Google Glass. But the results were reportedly limited, and Nest itself was beset by product delays and recalls. One new offering, the Nest Cam, appeared a year ago but Fadell admitted it had been a “gruelling year”. There were also complaints about his management style and failure to cooperate with other Google or Alphabet teams, as well as accusations of missed targets and poorly managed product upgrades.

Fawaz will bring smart home efforts back into the Google mainstream, drawing on his experience in leading Motorola Home for a year between 2012 and 2013, when Google still owned it. That division makes connected baby monitors, security cameras and home modems. Alphabet chief Larry Page said in a statement that he was confident Fawaz could “deepen Nest’s partnerships, expand within enterprise channels, and bring Nest products to even more homes”.

Fadell refused to show regret despite acknowledging disappointing shipments.

“I don’t know of any regrets that I have,” he said. “To do what we do at the level we do it, no one’s done it before. So you’re bound to make mistakes.”

The episode highlights the risks of a software and services company trying to be a device maker. If Thread becomes a standard, and reduces fragmentation in the connections that power the home, then Nest will have been worth the money, even if its core products do little for the Google top line. The aim is to penetrate the home in order to deliver more applications, and generate more big data and advertising. The thermostats and home cameras will be only a small part of achieving that, and now Google’s bid is riding on a different device, the home hub which launched at I/O to challenge the unexpectedly successful Amazon Echo.

Nest was entirely absent from those proceedings. From a business efficiency standpoint, it would have seemed logical to unite the OnHub WiFi router, the Google Home and Nest’s portfolio, but that did not happen. It may do now, with Fadell gone. Alphabet will certainly be keen to improve both financial performance and PR image at Nest, perhaps by integrating it into Google’s home efforts. And Alphabet has been reportedly pressuring its subsidiaries for more detailed business plans, as the parent looks to run a leaner ship.

Google will also have to try to assert smart home leadership in a far more challenging environment than that of two years ago. Nest was once a shining light in the fledgling IoT, but the entire consumer smart home market has cooled, partly because of consumer indifference, but also perhaps because venture capitalists have seen the leader slip up and stall. Apple’s apparently aborted HomeKit launch has also had an impact. Now the revival of interest is centering on the home hubs – Apple’s planned offering as well as Echo and Home – rather than individual end points. These may generate new excitement in the space, but it will be a very different market from the one where Nest originally blazed a trail.

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About the Author

About the Author: Caroline Gabriel is Research Director & Co-Founder at Rethink Technology Research. She has been analyzing and reporting in the hi-tech industries since 1986 and has a huge wealth of experience of technology trends and how they impact on business models. .


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