Google (NASDAQ: GOOG) is paying $3.2 billion in cash for Nest Labs, the company that makes smart house appliances like smoke detectors and thermostats that can program themselves and be controlled by an app. As soon as Google broke the news, the media started buzzing about how the Internet-search behemoth is sneaking into our homes, looking for ways to invade our privacy, and then use the data to boost its advertising revenue.
Google doesn't want to invade our privacy. It just wants to control every aspect of our life.
Jerry Holbert, The Boston Herald.
Understanding Google's strategy
Google started out as a search engine, but its ambitions have always been much bigger. Over the years, it released one product after another; each had something to do with dispersing information, and served as an impetus for Google to hold sway over online advertising.
It had a hard time building hardware that could give Apple (NASDAQ: AAPL) a run for its money. So it differentiated itself from its peers by designing top-notch software, and then giving it to hardware developers, rather than making hardware itself.
But in recent years, it has been expanding beyond its search-engine roots into hardware. It began focusing on the "Internet of Things" -- the concept of connecting everyday devices -- and tapping into multiple industries.
Several business moves -- the $13 billion acquisition of Motorola Mobility, the development of devices like Google Glass and Chromecast, the acquisition of Nest, all point in this direction. It also has dealings with companies that make robots and gesture-recognition technology, as well as numerous investments through its capital-venture arm, via enterprise, health, and life science.
Why is Google turning its focus to hardware? Because, as Nest founder and CEO Tony Fadell told the New York Times, "the way you're going to change the home is not just through software and services, you're going to have to change the fundamental products people interact with."
Why is Google getting involved in all sorts of different businesses? Because being good at one thing and trying to thrive on a specific advantage isn't good enough anymore. You need to be competitive at many things.
Ending the specialization myth
Professor of economics at Harvard University Ricardo Hausmann makes an interesting case for competitive advantage in today's world:
"Some ideas are so obvious after they are expressed that it is hard to deny their truth," he says in an article published on Project Syndicate. "But while some ideas are intuitive or obvious, they can also be dangerous and wrong…. One such idea is the notion that cities, regions, and countries should specialize," he adds.
If cities, regions, and countries make an all-out effort to excel on a limited number of activities and then try to cash in on their competitive advantage, they will narrow the range of capabilities. Specialization at the individual level eventually leads to diversification at a higher level. It is because individuals and firms specialize that cities and countries diversify, Hausmann explains.
Google is slowly but surely creating a world, where everything we want, need, and use will have its label on it. And it's doing that by buying out the best and most innovative companies in different fields and just letting them do their job. Nest Labs, for instance, was founded by Tony Fadell, a respectful entrepreneur, who along with co-founder Matt Rogers, were part of the team that came up with Apple's iconic iPod. Not to mention, many of Nest's employees have worked at Apple.
In other words, Google is bringing together small "cities" with their own technological endowment to eventually form "countries," which will prosper from various competitive advantages. Over the past couple of years, it has gone on a spending spree, acquiring the talent necessary to piece complementary bits of knowhow together and, in this way, push deeper into different areas.
As Bloomberg points out, in the past two years, Google has spent over $17 billion purchasing hardware and software companies, including Nest Labs. During the same period, Apple, Microsoft, Facebook, Amazon.com, and Yahoo! spent less than $13 billion combined.
Final thought
The Nest Labs deal was the latest in a string of acquisitions that will enable Google to diversify its revenue stream. As you know, Google is more than just a search engine. And is there a better place to start its quest for world domination than your home?
