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Why Google paid $3.2B for a thermostat company

The deal for Nest gives Google a stronger footing in the emerging world of the connected home

By Zach Miners
January 13, 2014 08:28 PM ET

IDG News Service - Google is moving into your home. On Monday, the Internet company said it was acquiring Nest, a maker of smart smoke alarms and thermostats, in a move that gives Google a strong foothold in a hot new market known as the "connected home."

The idea behind the connected home is to connect heating systems, lighting systems and appliances such as refrigerators to the Internet so that they can be made more efficient and controlled from afar. In the process, companies can collect more data about people's habits, something Google loves.

Nest's price tag shows Google means business: $3.2 billion cash. If the deal goes through -- which Google expects in the next few months -- it will be one of its largest acquisitions since the Internet giant bought YouTube in 2006 for $1.6 billion. Google has been interested in Nest since at least 2011, when it led a round of funding in the company, followed by another in 2012.

Nest makes a thermostat and a smoke-and-carbon-monoxide monitor that can be controlled via Wi-Fi from a smartphone, and that can re-program themselves based on people's behavior. The privately held company was founded in 2010 and has more than 300 employees spread across three countries. A good number of its workers, including CEO Tony Fadell, are former Apple employees.

So why is Google willing to cough up so much for such a young company? For starters, it likely saw a pool of talented engineers who can help it tap into a hot new market. It may also be seeking a launching pad to play a bigger role in connecting all those home devices, be they thermostats or perhaps one day your toaster oven.

"This is a new area for Google, representing a desire to take advantage of all devices," said Ben Bajarin, director of consumer technology at Creative Strategies, a market intelligence and research firm. "Google wants its own platform for this world of connected things."

Google certainly wants a bigger presence in the home -- it's shown that already through other products. Earlier this year it unveiled the Chromecast, a $35 device for streaming television, movies and other content to your TV -- its answer to Apple TV. It also operates the Play Store, providing all sorts of entertainment options.

On its own website, Google maintains a "tips" page devoted to Google services in the home, like how to use Google+ to "get the family together."

Linking home appliances is an emerging market where Google won't want to get left behind. The timing of the announcement -- coming on the first business day after the massive International CES closed its doors -- is interesting. At that show, the connected home was one of the biggest topics.

Reprinted with permission from IDG.net. Story copyright 2014 International Data Group. All rights reserved.
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