Today’s column is written by Joe Fullman, director of digital strategy at Arnold Worldwide.
It’s official: Google revealed yesterday that its purchase of smart home equipment company Nest closed last week.
When we first learned of the deal in January, many thought the most interesting thing about it was Nest's $3.2 billion price tag. Google’s offer was 60% above Nest’s most recent $2 billion valuation and 10 times its projected future revenues. The fact that only 1.1 million households had one of the company’s devices at the time of acquisition made the exit all the more impressive. The deal, which received regulatory approval from the FTC last week, was one of the largest in Google’s history. Only the Motorola Mobility and DoubleClick deals were larger.
Nest’s biggest product to date is a thermostat that combines an array of sensors with the computing power of the cloud to optimize the energy usage of heating, ventilation and cooling systems. Thermostats might seem like a bit of a shot in the dark for a company that has traditionally had trouble making money with hardware. But it’s not.
At its core Google has always done two things really well:
• Use technology to create utility people need
• Show people the best ad when they get there
Everything else the company does is simply a means to an end. Every project Google undertakes, from Android to ZMOT, is either meant to provide fuel for Google’s knowledge products or satisfy Adwords’ insatiable hunger for eyeballs and ad dollars.
The acquisition of Nest is Google doing what Google does best — hacking its way into nascent channels to ensure that Adwords will have a seat at the table.
Case in point: For the first decade of its existence. Google made billions of dollars without making any hardware at all. But its need to ensure the future of Google advertising on mobile operating systems led to the acquisition of Android.
Ten years later, and 20 months after the Motorola acquisition, some conclude that the company “failed” at making devices. The $9.6 billion loss Google took on the sale of the Motorola Mobility hardware business to Lenovo is staggering, one that seems to prove critics of the deal mostly right.
Yet, looking too closely at the mechanics of Motorola’s divestiture ignores the stakes of the game in which Google is playing. With 79% of global smartphone market share, Android has managed to transform the multipolar mobile world of 2008 into a two-horse race with Apple. And if the secondary market for low-end smartphones is any indication, mobile devices are nearing the peak of the global adoption curve.
With saturation comes commodification — a situation that looks better for a software-focused Google than it does for the more vertically integrated iOS. The Motorola patent arsenal that Google intends to share with Samsung will likely discourage Apple and the Rockstar Consortium from stirring up any more trouble for Open Handset Alliance OEMs on the intellectual property front.
The overall position of the Google mobile portfolio across Nexus, Android, cross-platform applications (Maps, Mail, Chrome, etc.) and, most importantly, ads has never been stronger. What more could they have possibly hoped for?
I bring this up because Motorola and Nest are intimately connected at a level that transcends allegory. If the Motorola acquisition was about securing intellectual property to shore up relationships with key partners (Samsung, LG and HTC), and the divestiture was about exiting a mature hardware market, then the timing of the Nest acquisition was no coincidence. If you believe a widely quoted story in TechCrunch, Tony “Father of the iPod” Fadell and his team of 200 (including about 100 former Apple employees) will make up the core of Google’s post-Motorola hardware group. Sound familiar?
I believe Google got into the smart home business for the same reason that they got into the smartphone business. Five years ago, mobile was the next big thing. Five years from now, we’ll have the same wistful recollections of a time before the “Internet of things” changed everything. By 2020, the “Internet of things” will consist of more than 30 billion devices, generate $309 billion in revenue to suppliers and produce nearly $2 trillion in annual global economic value, according to Gartner.
Despite assurances from Nest CEO Tony Fadell, a number of perennially Google-skeptic lobbying groups, such as EPIC and the Center for Digital Democracy, raised concerns about Google’s use of data generated by Nest devices. EPIC’s Mark Rotenberg returned his own Nest thermostat, lamenting inevitable intrusion given the fact that “Google doesn’t respect boundaries,” according to the Los Angeles Times.
No one will treat this issue more gingerly than Google because it has $3.2 billion on the line, but Rotenberg’s point is valid. When you look back at the history of Google — and the two things they’ve always done well — you can’t blame people for being worried. Even if the current generation of Nest devices isn’t selling “auto-away” data as a column append to your Acxiom house file, the writing is on the wall.
“History has shown that privacy policies do change,” Search Engine Land’s Danny Sullivan pointed out in The New York Times.
“They won’t hand over Nest data to Google, and Google mines it for whatever they want,” he added, “but there could be incentives or reasons why it might make sense to tie it to a Google account.”
In the long run, the output from Nest thermostats could provide Google with one key piece of information they might not already have: dynamic residential IP addresses of registered users.
By combining the IP address of an always-on Google device with information from devices within the home that may or may not be signed into the user’s own Google account, the company finally has a solid method to associate devices that belong to a household — smart TVs, over-the-top devices, tablets, Withings scales or network-attached printers, to name a few — with Google accounts and households.
The use case for this data would have been relatively nebulous in 2008, but today’s approach to data management doesn’t require defined objectives. Instead, it can be piped into a Google data lake and continuously correlated until it begins to produce value. The amazing possibility presented by this data today (and tomorrow) is that Google doesn’t need to know the questions they’re going to be asking with it.
At the simplest level, it might tell Google when users who weren’t logged into their Google accounts were at home. At a generalized and abstracted level, this data could be analyzed against specific geographies or psychographics to improve omni-channel attribution models.
By tying the tablet streaming a file to a television over Wi-Fi to an IP address associated with a Nest device, Google might be able to back into a physical address. Combined with time of day and knowledge of who lives in the house, Google might even be able to deduce who was watching.
There is value in all data, but obviously the closer that an individual action comes to a unique identifier, the more value that it can create. That’s what every DMP talks about but it’s very difficult without scale — and scaling ideas like Nest is a task that Google seems up for. It’s hard to imagine that Google couldn’t do a better job at connecting users together than Drawbridge or measuring attribution across channels better than Convertro or VisualIQ.
If Nest devices become more closely integrated with mobile devices, things might get even more interesting. Assuming that future generations of Nest devices may control the temperature within a room, adjust the lighting or the volume of music based on a user’s defined preferences, it may be practicable for Google to induce users to pair their mobile devices with Nest. In this case, Nest could provide insights about who was in what room when a particular pre-roll advertisement appeared on YouTube, or even more closely model the influence of linear TV.
Admittedly most of this may be half-baked speculation, but the overall direction appears pretty clear. Google is moving away from a mature technology (mobile) and toward a rapidly growing frontier (things). The fact that Google is making an investment into the Internet of things, a market that is already slated to explode, will only increase the speed at which these new technologies will begin to transform the experience of our environment. Assuming the company’s core values and vision haven’t changed, it will bring along the two things that it does best along for the ride.
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