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Why Google Invested $3.2 Billion in the Internet of Things

Iot head.jpg

Google is starting to make John Chambers' case. Chambers, Cisco's CEO, valued the so-called Internet of Things (IoT) in his 2014 International CES keynote last week at $19.1 trillion.

Less than a week later, Google buys Nest, the digital thermostat and smoke-detector maker, for $3.2 billion. Sure, there's a few trillion here and there to go. But what's that?

Welcome to the largest Internet of Things purchase to date.

"It's interesting to see just how quickly this will happen," Scott Strawn, International Data Corporation (IDC) senior analyst, told CMSWire about the growth of the IoT. "Google's acquisition of Nest will hasten the pace of the innovation." 

Not So Fast

While Google has a head start over many in the IoT race with Nest, Forrester Research's Frank Gillett reminded us that the connected world through IoT is in a "nascent" stage. Of all adults online, only 8 percent have any form of home automation, he said. The largest slice of that pie — 3 percent — is home security, Gillett added.

"We're talking about the very beginning of an age with this idea," Gillett told CMSWire in a phone interview today. "From a business point of view, businesses have initially experimented with machine-to-machine but not broadly." 

Although it may not have made a significant dent in the Cisco CEO's valuation — Google's purchase of Nest is still a pretty "meaningful acquisition," said Strawn, who covers Google and Amazon for IDC.

Not exactly meaningful in terms of nickels and dimes to Google — with $56 billion in cash on its balance sheets, Google "can cover it," Strawn noted.  But it is in fact Google's second largest acquisition to date, behind the $12.5 billion Motorola Mobility buy to boost its smartphone power.

"It behooves Google to be a leader in this Internet of Things space," Strawn said. "The question now is how it pursue it. But it's a meaningful step in that direction. There are now a lot of questions for exactly what to expect as a result of this. What are the other products that Nest hasn't already produced?" 

Home Investment

Google's acquisition this week gives the ever growing corporation a key way into homes and offices. Sure, Nest has proven its worth as a strong company. But this is more about connected devices and the IoT. And Nest is a pioneer there in the home.

As if Google wasn't in our homes enough, the $50-billion 2012 revenue producer out of Menlo Park, Calif. has a stamp on the gadgets that keep us safe and warm. Nest's Learning Thermostat and Protect (Smoke + CO Alarm) are signature products for the 130-employee company founded by former Apple executives Tony Fadell and Matt Rogers. 

Nest is all about the IoT, with Fadell once boasting they are major drivers, kick-starters, in fact, of the concept. A key slogan for them is "Welcome Home," and by "home," that means Google now for Nest, with Rogers (left) and Fadell flanking Google CEO Larry Page here:

What's Google Going For?

"Google's acquisition of Nest for $3.2 billion affirms the growing strategic importance of the idea of the Connected Home," Forrester Research's Gillett said. "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."

Google Glass and Chromecast have been winners for Google. But with Google TV not living up to the hype and Nexus Q being named one of CNN's top 10 fails of 2012, Google's trying another play here with Nest. Same end goal — connected devices powered by the Internet — just now outside of entertainment.

"Google will open up the somewhat closed approach that Nest used to date, to better integrate with interoperable smart home solutions that have entered the market in the last year, such as SmartThings, AT&T Digital Life and Revolv," Gillett said.

Smart Move

Google's move is a smart — and expected — play for the search giant, IDC's Strawn said. It "makes all sorts of sense" because Nest is a "leader when it comes to the Internet of Things, and that falls directly in line with Google's long-term and short-term interests."

 

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