Rather than continue its struggle against Apple (NASDAQ:AAPL) in the area of consumer gadgets, Google (NASDAQ:GOOGL) opted to buy Nest Labs for a hefty $3.2 billion in cash. The move by Google is intended to narrow the gap between the two companies. Nest Labs is a manufacturer of digital thermostats and is led by Tony Fadell, a former senior vice president at Apple who also worked closely with Steve Jobs to help create the iPod and iPhone.
For several years, Google has been a household name, as the company managed to dominate the Internet search space almost immediately. Google, with its catchy name and colorful letters, has even taken the lead in smartphone software with its Android operating system. The Nest buy will bring more talent and devices to Google, following its $12.2 billion acquisition of Motorola Mobility two years ago, along with the company's move into connected products like the Glass eye wear.
Where Google excels
Ben Schachter, an analyst with Macquarie Securities, has the equivalent of a buying rate on the stock and has said, "Google has done extraordinarily well with the technology behind a lot of different things, including Android and search, but [the company's] design has historically been relatively weak."
What does this buy mean for Apple? For one, it makes Google an even stronger competitor, especially in the connected device market where web-based software meets hardware.
According to McKinsey Global institute, the Nest deal also tips the scales in Google's favor as far as the Internet of Things market, an industry of wireless, connected gadgets that will generate between $2.7 trillion-$6.2 trillion of economic value annually by 2025. However, Google's hardware results to date have been hit or miss at best. Sales at its Motorola unit plunged 34% in the third quarter to $1.18 billion.
Additionally, Google's Nexus tablet has yet to gain enough traction to compete with the Apple iPad. Five years ago, Douglas Bowman left Google for Twitter, citing the search company's devotion to data sometimes stifled innovation. That's where Nest fits right in, as it represents "a further push into consumer hardware," according to Carolina Melanesi, a director at market research firm Kantar Worldpanel.
Nest's secret weapon: Tony Fadell
From 2006-2008, Tony Fadell had a profit of $61.2 million from the exercise of options and sale of Apple shares, according to Equilar. After leaving Apple, he started California-based Nest in Palo Alto. While at Apple, he served as an engineer, a master of every aspect of the hardware process with a high-design sensibility to top it off. With Fadell, Google is getting itself near-instant and much-needed credibility in the hardware realm. Matt Rogers, co-founder of Nest, is another former Apple employee and was also part of the original iPhone team. According to LinkedIn, 97 former Apple employees are now employed at Nest.
Fadell said that Nest executives reached out to Google about working together from a technology perspective. That evolved into talks about Google acquiring Nest, later involving Google's Chief Executive Officer, Larry Page. Soon, Fadell became convinced that it was the right move. It's safe to say that buying Nest was a move to start creating hardware that's comparable to its software.