Why Nest Is Worth Every Penny

Why Nest Is Worth Every Penny

The news today that Google is buying smart thermostat-maker Nest for $US3.5 billion seemed slightly unhinged; why overbid for what’s still, at present, a niche product? The answer is so simple it’s barely worth a shrug: because it can, because it needs to, and because if it didn’t, someone else would have.

From a financial standpoint, $US3.5 billion for a company whose most recent — and even then jaw-dropping — valuation was around $2 billion not two weeks ago seems modestly insane. Especially given that the $US2 billion number was itself more than twice the $US800 million valuation reported by GigaOm last year. And double especially when you remember that this is a company whose product, while popular, ships only in the tens of thousands each month.

As of September 30 of last year, Google had nearly $US55 billion in cash to play with. And while a future-looking world-domination buy like Boston Dynamics is fun to play with, Nest gives Google something it’s been sorely lacking: A chance to get inside people’s homes. Actually, it’s better than that. It’s a chance to get inside people’s brains.

It’s important to remember that Google, for all its headline-grabbing moonshots, is an advertising company. It makes its money by serving highly relevant ads against searches that you make in your browsers, or conversations you have in your email, or poetry you dictate to Google Now. And while its purchase of Motorola and various Nexus partnerships have landed it some very competent phones and tablets, Google’s attempts to invade the homestead — a place it would very much like to invade — have fizzled at best, and been laughable at worst.

Google TV? More than three years later, still without hardware anyone cares about. Logitech abandoned it altogether; LG decided webOS would be a better bet. Yep, that’s the same webOS that’s basically been a walking, Weekend at Bernie’s-type carcass since 2011. Rebranding Google TV as might help a bit — at least until Apple makes its next big living room play.

The media-streaming Nexus Q orb? So deeply bad that it never made it out of preorders. Google Glass? Incredibly neat, very future, but socially stunting . Chromecast? Wonderful, but limited, a cheap and cheerful bichon frise nipping at Apple TV’s heels.

Those fumbles matters. Forget wearables; the home is the next great frontier for tech companies looking to sell not only hardware, but hardware that can learn about you. Every bit of data that Google can squeeze out of your life helps its advertising engines quantify you. The more parts of your life it can turn into 1s and 0s, the easier it is for the most relevant ad to find you in the internet wilderness.

But Google’s fundamental problem with home-grown hardware has always been that while it knows more about technology than just about anybody, it doesn’t understand the people who use it. And while Nest’s greatest weakness is that it only has two products, neither of which appears to have the kind of sales that justify a $US3.5 billion check, its great strength is that it understands the problems human beings have, and how to solve them in an approachable way.

And honestly, you might not mind Google snooping around in your thermostat, at least a little. Google recently introduced location-based reminders (“Remind me to get baby wipes when I go to Safeway”). Imagine if it could do the same through your home, rather than through your phone. It could harness the same incredible network it uses to predict flu outbreaks and whether a movie will bomb to make your home more efficient, safe, and smart.

Google didn’t buy Nest for a thermostat and a smoke alarm (although those will both be nicely profitable businesses someday, if they aren’t already). Google bought Nest for the brains behind those products, the empathy that it has found lacking in itself.