As an investor, Google's (NASDAQ: GOOG ) recent $3.2 billion acquisition of Nest Labs, a provider of solutions for the "conscious home," is likely to be a win, regardless of valuation questions. Some industry pundits question whether Nest and its Internet-connected thermostats are worth billions, but Google knows where the real value is: information.
There's a reason Google gives away its Android OS to mobile device manufacturers: It drives traffic to Google sites, which in turn propels the search giant's primary source of revenue: advertising. Of Google's $13.77 billion in revenue last quarter, more than 90% came from websites. Google is the online advertising king because it's able to collect and manipulate massive amounts of data and use that information to better target online ads at users. And now Google and its information-gathering machine is coming to a home near you.
The Nest product line, which for now consists primarily of "smart" smoke detectors and thermostats, is selling like gangbusters, if management is to be believed. "Tens of thousands" of Nest smoke detectors came online within a few days after the device was made available last month. And, according to estimates, Nest is doing fairly well moving its interactive thermostats, too.
Though Nest co-founder and ex-Apple exec Tony Fadell isn't sharing specifics, the best guesstimates put the number of "learning thermostats" at slightly more than 1 million units, and counting. If correct, that would equate to about $275 million in revenue, based on a retail price of $250 per thermostat.
Even accounting for sales from its smoke detectors , Nest will hardly make a blip on Google's annual revenue radar. So how does Google justify dropping $3.2 billion on a niche home products maker? The same reason it makes sense to spend millions developing a self-driving car: tracking user information.
What's in it for Google
Getting inside your house isn't a new objective for Google CEO Larry Page and team; its been trying to become your roomie for years now. Google followers may recall its unsuccessful Android@Home and PowerMeter initiatives a few years back. Connecting your home appliances with mobile computing devices, and being able to manage it all from anywhere on the planet, sounds pretty good. And Google's working to bring that futuristic concept to reality.
Imagine a home where locks, electricity, lights, and virtually anything else you can think of are all tied to the Internet. That's what the Nest acquisition means for Google: A step in helping consumers manage their lives using the "Internet of Things." Already, Google has and uses mounds of data on all its users, including what time online searches are done, what's being searched, the number of emails sent and received, Android device usage, location, and who knows what else. In short, Google's data collection and assimilation puts most governments to shame.
With the Nest acquisition, Google intends to add information on consumers' living habits to its ever-growing data-compilation efforts. While the Internet of Things sounds like a good reason to gather and use all that data -- it's for our benefit, after all -- making lives easier isn't what Google's intensive information gathering is all about. It's about Google's ultimate customer: advertisers. Imagine how well Google's clients can target ads when they know who you are, what you like, where you go (thanks, self-driving cars), what you buy, and virtually everything else about you. Maybe the NSA should issue monthly reports on Google's data requests, not the other way around.
Final Foolish thoughts
It seems some Americans don't mind the ongoing tracking of behaviors and monitoring of communications that we've become familiar with of late. As long as all that data collection is done to make our lives easier and safer, who are we to complain?
For Google, Nest is a $3.2 billion means of gathering all-important information that will almost certainly help it continue growing advertising revenue. And that's good news for investors. But it also begs the question: Are you ready to make room at the family breakfast table for Google?
Google's been a good play, where else can you make money from its dominance?
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