Why Did Google Buy Nest? More Importantly, Why Didn’t Apple?

Google announced yesterday that it’s buying Nest for $3.2 billion. Almost exactly a year ago, I suggested that home automation perfectly fit the Apple mold, especially given its connection with Nest’s founder and CEO Tony Fadell. So, why did Google end up with Nest and not Apple? Clearly Apple was involved in negotiations yet Fadell ended up going with Google. What can we surmise from that?

At the risk of a gross generalization, I think what we see here is several issues with regards to Apple:

  • Despite conversations about the Apple ecosystem, at its core, Apple is a devices company that builds elegant software to run on those devices. Less elegant, though, are the services that connect the devices. iTunes is stale. (There, I said it.) Its cloud offerings are not really competitive and it struggles with broad-scale integrative software.
  • Apple doesn’t partner well. The music industry still resents Apple’s control over digital music distribution, Apple has been found guilty of collusion in the book selling market, it has met considerable resistance in trying to do to TV what it did with music, and it exerts iron-clad control over its app distribution market.

On the flip side, Google, for all its flaws (and they are many), has a different vision.

  • It sells devices only to force change in markets it wants to see changed (phones, tablets, Cable TV). Instead, it uses its economic largesse to force changes in closed markets.
  • Google partners better. Carriers are delighted to have a free software platform with which to counter Apple’s ecosystem control. I’m not going to go into the anti-competitive things Google does here — that’s a subject for another day — but in the end, companies have a more open playing field in the Google sandbox than in the Apple one.

Why is this important? Well, the marketplace into which Nest is playing is not dissimilar to the cell phone marketplace.  If you’re thinking of Nest as merely a “smart thermostat,” you’re missing the real strategy behind the company and the reason why Google paid so much for a company who has only sold tens of thousands of devices. More interesting about Nest is the relationships it has with power companies.

This is a hugely disruptive play. Think of all the talk about the “smart grid.” To use a computer analogy, the smart grid has been developed to date with a mainframe-like point of view.  Sure, we’ll build intelligence into the network but the intelligence will be centrally oriented, dominated by the utility companies. Nest has a vision of a world where the intelligence is much more distributed and in fact begins with a bottoms-up approach to the market. Begin with adding intelligence to end points in the network and only then can you begin to effectively manage and distribute efficient power solutions so that thinking goes.

That’s what Google’s betting on and that’s why Google was a better fit for Nest.  At the end of the day, Apple wants to sell intelligent devices connected by Apple software solutions. Google, by contrast, wants to build intelligent data-creating ecosystems, selling services around the software and data it collects. And what does Nest represent if not the potential for monetization of the home utility equation. Heck, the thermostat may one day not only be free but the power company will give you, or builders, incentives to include it in homes and offices because the economic value of the information and connectivity dwarfs that of the price you could get by selling the device…to a small subset of the market.

I really thought Nest was going to end up with Apple.  The fact that Google showed the vision to make the acquisition is the most damning thing you can say about Apple’s future prospects and a strong positive for Google. Years from now, we may look back at this moment as a big tipping point.

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