Google Inc's Nest Buys Dropcam, Adds to Its Home Automation Portfolio

The online search giant is putting together a product offering that might make it a force in the growing field.

Jun 27, 2014 at 8:36AM

Google (NASDAQ:GOOG) has strengthened its home automation offerings by buying surveillance camera maker Dropcam for $555 million. The purchase, made by the company's Nest brand, shows the search giant's executives remain convinced that home automation -- which has so far been a relatively small market -- will greatly expand in the future.

The addition of Dropcam broadens Google's ability to compete with companies like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). It also gives Google an answer to the home-security companies attempting to market automation add-ons to their existing alarm customers. The move takes Google beyond the niche that Nest serves with its remotely accessible thermostats and fire alarms, and into a broader market.

Google bought Nest for $3.2 billion four months ago and it has remained a wholly owned stand-alone brand. Dropcam will not be run the same way; it will be folded into Nest's offerings. Nest co-founder and head of engineering Matt Rogers said in a blog post that he thought the two companies were a natural fit.

He also addressed what he saw as a potential concern from Dropcam users: their information potentially being used to target ads. Rogers said data will not be shared with anyone -- including Google.

"Nest has a paid-for business model and ads are not part of our strategy," he wrote. 

For now, very little will change for Dropcam's existing and potential customers. User log-ins will remain the same and the company's products will continue to be sold through all its current sales channels, which include Dropcam's online store and (NASDAQ: AMZN).

What is Dropcam?
Dropcam and Nest have a lot of similarities. Both companies use tightly integrated hardware and software with a very limited number of products. The camera company offers only three models: the $149 Dropcam, $199 Dropcam Pro, and $29 Dropcam Tab. All three devices are designed to help customers monitor home activity through motion sensors and video recording. 

The Wi-Fi-enabled Dropcam and Dropcam Pro lets users access their camera feeds and even project voice (via speakers) using the company's mobile app. The camera-less Tab can be placed on windows and doors to monitor activities.

How big is home automation?
Multiple companies are pursuing home automation strategies even though the technology has not yet made a major splash with consumers. Google, Apple, and Microsoft are all entering the space based on where they expect the market to go, rather than where it is now. Predictions for the potential size of the home-automation market are starting to make those investments look sensible. 

Home automation is part of a broader movement -- the Internet of Things -- which is the concept that devices will be connected to each other through the Internet. This could be as simple as a home coffee pot that can be told to brew via a smartphone connection, or as complex as connected hospital machinery that can pre-emptively order its own repairs. 

Research firm IDC pegs the size of the IoT market at $1.9 trillion in 2013, but the company expects that number to climb to $7.1 trillion by 2020.

Not all of that money will go into home automation, but as the technology becomes more prominent in business, its acceptance in homes should grow. Right now, most home automation services are exactly like they have been for the last 20 or so years -- gimmicks. It's a parlor trick to lock doors or turn off lights remotely. The next generation of products -- like the ones from Nest and Dropcam -- are still gee-whiz cool, but they have practical benefits in energy efficiency and offer useful services.

Imagine parents traveling while teenagers are left at home. They can use Nest to monitor whether the kids are turning the heat up too high, while using Dropcam to make sure there's no party being hosted. 

Is this good for Google?
With the home automation market still in its infancy, Google is essentially loading its portfolio to meet potential needs. Nest and Dropcam seem like logical complements that can be rolled into a bigger play. What Google appears to be missing is a unifying platform.

Microsoft has that through its deal with Insteon, which allows users to control a suite of home automation products through Windows phones, PCs, and tablets. Apple has not formally announced its intentions, but it has been widely reported that the company plans to launch a home automation offering that can be controlled via an iPhone -- and presumably iPads and Macs.

To compete, Google will need to integrate its different products through an Android app. That is something the company has had a hard time doing with its web services. Products like Google Drive and Google Hangouts are oddly difficult to switch between, and the company has no unified presence.

If Google can correct that by grouping its home automation services under a single app, the Nest/Dropcam combo is a strong start to a product portfolio. The Nest offering -- even with Dropcam -- is still far from complete. The joint company needs products that address remote-controlled entry as well as a means to control appliances.

Adding visuals -- through Dropcam's cameras -- is an important step to making Nest less a novelty and more a practical system that non-techies will adopt. It's still very early in the game, but Google looks to be putting the pieces into place to compete.

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Daniel Kline is long Microsoft and Apple. He would love to be able to control his cable box DVR remotely. The Motley Fool recommends, Apple, and Google (C shares). The Motley Fool owns shares of, Apple, Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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