Handicapping Google's $3.2 billion bet on the Internet of Things

Google's $3.2 billion cash purchase of Nest Labs is a gamble on the importance of the Internet of Things and its growing role among consumers.



The tech world is buzzing about Google’s announcement that it is paying $3.2 billion cash for Nest Labs, the company that makes thermostats and smoke and carbon-monoxide detectors that can program themselves and interact with smart phones. One of the obvious questions is what does this purchase mean for the Internet of Things (IOT), which is the term that refers to everyday objects that connect wirelessly to the Internet to make them smarter, such as with Nest’s products.

There’s no question that IOT is growing. According to ABI Research, there are more than 10 billion wirelessly connected devices in the market today and more than 30 billion devices are expected by 2020. Google’s purchase of Nest has further cemented the importance of IOT.

Gilad Meiri, CEO of Neura, said, “The Nest acquisition by Google is yet another validation point that the Internet of Things sector has graduated far beyond its startup phase. Google has made an art out of deeply understanding how people interact with their virtual world, the Web, and in so doing has been able to monetize that understanding in wildly successful ways. This acquisition is the first of what we see as potentially many next steps by Google and others to further understand the vast amounts of data representing how people interact with their physical world.”

Meiri said, “There haven’t been many mergers and acquisitions in the IOT space … This is obviously a whole new ballgame. I believe there will be a golden time for IOT acquisitions where the big fish fight to get the best in space and as a result the landscape will experience price premiums. However I don't believe we have entered that era. Google's purchase is a very aggressive statement that represents a new stage in the space - essentially graduating its startup phase. But I don't believe it is a strong indicator for near term future inflated mergers and acquisitions.”

Google goes deeper into homes

Although the $3.2 billion price tag has resulted in plenty of attention as to whether the company is worth that much, Nest is valuable to Google because of that access into people’s homes through smart home automation devices. A ZDNet article cites Forrester Research analyst Frank Gillett, who said, “Google's acquisition of Nest affirms the growing strategic importance of the idea of the connected home. It also shows that Google increasingly believes in hardware/software solutions, such as Nest has built, rather than just building operating systems for other manufacturers to implement in smartphones, Chromebooks, and TVs.”

The marketing component is also pertinent, according to Richie Lauridsen, director of operations for SEOhaus, because, he said, “Google's purchase of Nest underscores how physical commodities can now become valuable ways to transmit data. As more and more devices are connected via network or otherwise, IOT is increasingly valuable. Google's purchase highlights how valuable personal data in any increment has become.”

Former Apple exec on board

There is also the benefit that Google receives by getting former Apple designer Tony Fadell, CEO of Nest, on board.



Lauridsen said, “Google gets data and the savvy of a hardware designer who helped shape the tech world's most intuitive products in the iPod and iPhone. Barry Schwartz at SEORoundTable said that Google purchased this completely for the hardware design, while I think Google capturing data within the home represents more value.”

Google has already been investing in Nest, so this was the obvious next step, according to Adam Justice, vice president of ConnectSense. Justice said, “Google Ventures was heavily invested in Nest already, they put in large investments in their Series B and C rounds of funding. This was the next natural step for them. I think they wanted to put their full resources behind the company and help them accomplish their vision as well as get more Google devices into people's everyday lives. I also see this as a natural next step for Android, as mobile and home automation go hand and hand.”

The home automation market will see a strong boost with Google’s involvement, said Carol Spieckerman, president of newmarketbuilders. She said, “With Google's support, Nest will be able to ramp up its distribution and expand product launches at a much faster rate which will validate and accelerate the Internet of Things movement as a whole. As scale is achieved, prices will also sharpen which will amp up awareness and adoption rates among consumers. This is great news for the brands and companies involved given that smart home technologies have been a bit slow to take off up to this point. Google is taking a leadership role and everyone else will benefit.”

By Teena Maddox

Teena Maddox is a former Associate Managing Editor at TechRepublic. She oversees TechRepublic's news team and TechRepublic Premium. She focuses on tech and business and how the two worlds intersect. Teena's lifelong journalism career has included wri...