Google Stirs the Hornet's Nest of Smart Homes Eco-systems

Jan 14, 2014

I came in to the office this morning to the news that Google will pay US$3.2 billion / EUR2.3 billion / GBP2.0 billion for Nest, a home automation device manufacturer. My first reaction was celebratory; I was hopeful that Google’s financial and technological reach could finally push what is still a fragmented smart home market to resemble some form of mass market adoption. In further consideration, I could not arrive at the same conclusion on Google’s valuation of Nest at this stage of market development. There are many viable alternatives in developing smart homes market; particularly in achieving a standardised platform on which new smart home services can be deployed. However, the main reason for a lack of progress in this market is not an issue of technology but user habits and preferences. Currently, not every home user appreciates the (in)tangible value of a truly connected home. Most definitely, the issue of using personal data also makes many uncomfortable. As such, I struggle to see what Nest, at GBP2 billion, brings to Google in the broader smart home context.

Without a doubt, Nest has successfully added both an aesthetic appeal and intelligence to what are traditional fittings in a home. Nest has made such beautifully attractive smart thermostats and smoke/heat sensors that they could advance into the aspirational category of “must have” home gadgets. These clever sensors will also be the devices through which the home owner can control the ambience of the home. The consumerisation of home automation products - combined with macro-social changes in energy consumption patterns, habitual reliance on continuous connectivity and a rise in consumer apps – paint an optimistic outlook that a smart homes vision could soon become a reality. With Nest’s products and analytics capabilities, Google is positioned as a core technology enabler of smart home infrastructure.

Congratulations to Nest for riding this acquisition wave successfully. This cash deal is, in my view, extremely generous for a startup with a limited customer base that operates in a market that still requires significant development to reach scale. Just as a comparison to underline why I feel this could be an inflated valuation based on hopes/expectations rather than short-term potential; Vodafone bought Cable & Wireless, a telecommunications company with assets and long standing customers, for GBP1 billion. I am intrigued to learn more about Google’s overall smart homes strategy, particularly as the fundamental challenges of user adoption remain unsolved.

Yiru Zhong


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