Nest is a company that makes smart smoke detectors and smart thermostats. That’s neat, but that gadget business alone is not worth $3.2 billion, the price Google just paid for Nest. There are a bunch of reasons Google was willing to give Nest’s investors a 20x return on their investment, including its pool of talent. But the full scope of the most important reason of all has been absent from most of press coverage.
Nest is Google’s first major acquisition in what will some day be a trillion-dollar market: The “internet of things.” The internet of things is a catch-all for the movement to connect every single electronic gadget we own to the internet, while also filling the world with inexpensive, always-on sensors.
To make the internet of things happen, we’re going to have to also fill the world, and especially our homes and businesses, with hubs designed to wirelessly communicate with all those smart toasters, smart lights, etc., while also coordinating their actions.
Think about how long it took Wi-Fi to become ubiquitous. Now imagine that there isn’t even a communications standard like Wi-Fi for device manufacturers to stick to—presently, there’s no common language for the internet of things. Wouldn’t you want to be the manufacturer that created the one box that could end up everywhere, and which spoke a language that only your devices could understand?
This is why Google was willing to pay $3.2 billion for Nest—it gets a hardware manufacturer stuffed to the gills with former Apple talent. And now Google has a chance to define what will be the biggest thing on the internet since the world wide web. It’s not so different from when Google acquired Android, an acquisition that was a bet on the future of the the internet, and therefore the future of search.
At least one Google executive has already made it clear that the company’s goal is to “put computing everywhere.” Plus, Google has the opportunity to make real money from its entry into the internet of things. With Android, Google was playing catch-up, so Google’s only real chance at beating Apple was to make Android free. Not so with the internet of things, which has yet to find its Apple.
Google has many competitors in the internet of things, of course, from smart home automation systems by office retailer Staples to smart home startups like SmartThings. But their resources are puny by comparison to Google. Plus, Google already controls the world’s best-selling remote control for the internet of things, otherwise known as the Android smartphone.
It’s easy to see where all this is going: Smartphones will be the internet-connected hub for a network of “things” that are attached to or are in range of our bodies. And more powerful and capable hubs built by Nest/Google, and possibly disguised as something else, like a smart thermostat, will create networks that span our homes and businesses.
Outside the home, city-wide networks will continue to be controlled by mobile carriers. But Google could always decide to buy a competing technology and get into that business too.