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Why Google swapped Motorola for Nest.

February 13th, 2014 |  Published in Usability & Design

You can normally expect CES to set the technobabble agenda for the first few months of any year, but this year, despite the hubbub about Wearable Devices, Home Automation and the Internet of Things, CES played second fiddle to the much bigger announcement of Google paying $3.2bn for Nest. On the face of it, it’s an outrageous amount to pay for a hardware company. The announcement a few weeks later that they were selling off Motorola Mobility for around the same amount made it look like some giant game of cards.

The initial reaction to the Nest acquisition from many commentators was that this just validated their view that CES was heralding the start of the Home Automation market. Long term players, like Control4, saw their share price rocket overnight. Most start-ups in this space have been complaining that their VCs dedicated their next board to persuading the CEO to redesign their business plan in the hope of emulating the Nest sale. On the other side, doomsayers predicted the demise of anyone else in the field as the Mountain View leviathan would take over Home Automation.

Most of what has been written feels like a knee-jerk reaction. What surprised me most was the speed with which Google rushed to say that it would not be using the data from Nest’s thermostats. That announcement came too quickly to be a reaction to media speculation about the data behemoth’s new-found ability to learn even more about users. It made no sense given Nest’s purchase value. It was like a top restaurant hiring Heston Blumenthal and then saying they were only employing him to go out and collect their lunchtime sandwiches. Google is about data. Why pay $3.2bn and then throw the associated data opportunity away? It implies that there’s a lot more behind this acquisition.

Let’s start with the data aspect. Household data is contentious. In various countries, smart metering programs have been stopped or delayed because of consumer concerns about data privacy. There is an irony here. In most cases energy utilities are even more scared about getting this data than consumers are about giving it up. Utilities don’t understand data. Their current business model only just about manages to cope with one or two meter readings every year. The prospect of getting hundreds or thousands of data points from a user every day is their worst nightmare – that’s not their business.

The two groups whose business it is and who would most like to get hold of this data are companies like Google and mobile network operators. Both know a lot about us – Google from our interaction with the Internet and mobile operators from the way we use our phones. What both lack is information about all of the time in our lives when we’re not interacting with a screen. Getting access to any source of data that tells them how we interact with our house, the appliances within it or the things we wear is their Holy Grail. Each tells them a lot more about our life.

In my opinion, the Nest business model still has questions. There is no denying their smart thermostat is a beautifully designed product, but there’s debate about how much data Nest is retrieving from them, as much of the intelligence appears to be embedded. However, they represent around 100,000 deployed sensors which monitor and understand householder’s habits and are capable of sending this data back to Nest’s servers, which are now ultimately owned by Google. Google is not stupid. Yet it’s claiming it won’t use this data. So why did they pay $3.2bn for the company?

Google’s business is not about hardware. Few people, including a fair number of analysts, seem to realise that Google is actually an AI (Artificial Intelligence) company. Algorithms and machine learning and their application pervade every aspect of what they do. You need to understand that almost all of their products are merely platforms or carriers for that AI, or vehicles to provide the data to feed it. Their business plan is extracting or embedding insight and hence value. You can see this in most of their acquisitions, where there is invariably a strong AI component, as is the case with their purchase of London based Deep Mind a few weeks ago. The two notable exceptions to a data /AI led purchase have been Motorola Mobility and Nest.

Google acquired Motorola at the height of the Smartphone patent wars. Google has historically had relatively few patents; this purchase gave Google a war-chest of IP which it could use to negotiate deals to protect Android and its licensees. In the last few months, Google has been at the forefront of a growing industry movement to evolve from litigation to cross-licensing agreements, having recently signed deals with Samsung and Cisco. It needed the Motorola IP portfolio to do this and it remains important, but the landscape is changing. We’re already in a post-PC era and probably past the point of peak innovation in Smartphones. The market is adapting to the fact that execution is more important than litigation as consumers begin to vote purely on price and apps.

Although many dismiss Motorola as a hardware player it’s had its moments. Before the arrival of the iPhone its RAZR was the iconic must-have phone – much the same role that Nest’s thermostat now holds, which shows how tenuous the position of an iconic product can be. Now, in a market where most phones look very similar it’s not easy being a hardware vendor, as Google has discovered, particularly when you’re also competing with companies who might want to use your software. It’s clear that Google realises that it no longer makes sense to have a hardware play in the smartphone market, but it raises the question of whether it makes any more sense for them to have a hardware play in a nascent sensor space, such as home automation? Particularly when the market hasn’t really started yet and they’ve already stated that they won’t use this acquisition to use data from the home. Google also discovered that Motorola was a largely US centric company, which is considerably smaller than Google’s ambit. But then so is Nest, due to the particular nature of US HVAC wiring in homes. So why would Google buy a local hardware company with no IP, however attractive its product?

I’d suggest the answer lies elsewhere. To find it, one needs to look at the three big companies that are vying for the consumer, at least in the market’s view – Apple, Google and Microsoft and ask what they most fear?

Apple’s concern is where it goes next? It has had a meteroric decade, making winning decisions from the iPod, through the iPhone to the iPad. But its lead is slowing as the level of innovation is stalling. Everyone is waiting for the iWatch, despite the fact that competitive offerings have failed to excite the market. The reality is that the battle for the wrist is currently being won by fitness companies, which may explain why Apple has been recruiting so many key experts from the medical sensor industry.

Microsoft is also having problems engaging consumers. The PC and laptop market is in decline, the gaming market is static and even with their purchase of Nokia handsets, it’s failing to excite consumers with its mobile offerings. Rumours of an impending Android phone from Nokia won’t help. Its corporate and cloud business remains healthy to the point that you could argue it should sell its consumer-facing divisions, which probably weighs heavily on the mind of Satya Nadella – its new CEO. But if it does that it loses what it has always appeared to want more than anything else – to have its brand at the end of every consumer’s fingers.

Google goes from strength to strength, happy to watch both Apple’s and Microsoft’s lustre fade in consumer’s eyes. It worries less than it used to about patent injunctions, now that it is leading a new regime of cross-licensing within the industry. But I guess that the one thing that keeps it awake at night is the concern that either Apple or Microsoft, in their post Steve and Bill era, find a new visionary leader who challenges their ownership of user data, becoming the industry beacon that reverses their fortunes.

That’s where I’d suggest Tony Fadell – Nest’s CEO and founder may have been playing an cunning strategic game. The industry is currently sadly lacking in charismatic visionaries – most have died, moved on to spend their money, or are past the visionary stage. Tech companies have matured and have considerably more C level executives in suits.

Tony fits the bill as a worthy successor to the fading generation of tech visionaries. It’s worth listening to him talk about his philosophy in an interview on 99u. He speaks eloquently of his personal development in the tech industry. His first decade was learning, the following one of using that knowledge to build things and the last one in mentoring others. It’s a pretty good career path to become a visionary in this industry. In his eyes, engineering products is all about atoms and electrons – the things we can touch and the information they can convey. It’s a pragmatic way of describing what is being hyped as the Internet of Things. He’s driven by a frustration about things that don’t work or don’t exist, which generates a passion to combine those atoms and electrons into something that solves a problem with the elegance that makes it desirable. It’s a story of creativity, going back to when his Grandfather taught him how to build things. I fully share that philosophy and my guess is that someone at Google does as well. What probably worries Google more than anything else is that Apple should share the same view and look at Tony as a potential Steve 2.0.

Would a company really pay $3.2 billion to keep a visionary out of the hands of a rival? The benchmark in the industry for valuing key technical staff in an acquisition is between $3 and $10 million per head, but that’s for key engineers. In comparison, Satya Nadella’s annual remuneration package is around $18 million, but that’s just for a CEO – Bill’s still at his side to help with the vision. Real visionaries don’t come cheap. The stakes at this point in the technology cycle are very high. To reiterate, we are in a post PC era. Tablets probably have a limited number of places to go other than heading for commoditisation, closely followed by smartphones. What’s coming next is debatable. Home automation will arrive at some point, but it’s questionable how far it will penetrate into legacy housing, rather than new build. Even then, manufacturers have to find a way to break the 20 year replacement life cycle of existing home infrastructure products.

The battlefield will probably be wearables, whether that’s a smart watch, fitness band or smart glasses. I’d argue that Google Glass may be the most important innovation of those three. It certainly generates more data than any of the others. Whichever wins, Google will want to own the data flowing out of it and it will best achieve that by embedding its AI within it. If owning Tony prevents a competitor from owning the data produced by their wearable devices, then $3.2 billion may be a cheap price to pay.

I’m sure Nest will use their new owner’s resources to allow them to innovate further. But it would not surprise me to see Tony and his fellow designers devoting more of their time to Google’s personal hardware products like Glass. Will Google ever becomes a volume hardware manufacturer? I suspect not. Its interest is in enabling platforms and gathering data from them. Once they can demonstrate a vision, it’s generally more efficient to let the market take on the mantle of evolution.

Both Nest and Glass are objects of desire. Both herald markets which can become game changers to the advantage of Google. They share the same vision, which is of new, desirable and useful products which generate and consume data for their AI algorithms. To continue its current success, Google’s long term business model may have more need of visionaries that its competitors. This acquisition may be proof that Google is well aware of that need.

 

(Nick is available for sums up to and including $3.2bn.)

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About Creative Connectivity

Creative Connectivity is Nick Hunn's blog on aspects and applications of wireless connectivity. Having worked with wireless for over twenty years I've seen the best and worst of it and despair at how little of its potential is exploited.

I hope that's about to change, as the demands of healthcare, energy and transport apply pressure to use wireless more intelligently for consumer health devices, smart metering and telematics. These are my views on the subject - please let me know yours.

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