Season 2, Episode 3 Nest

Summary Notes


In season two, episode three of the podcast "Acquired," hosts Ben Gilbert and David Rosenthal delve into Google's acquisition of Nest in 2014. They discuss the strategic implications and the cultural clashes that followed, including the controversial purchase of Dropcam and the internal drama that ensued. The episode examines Nest's journey from a promising startup aiming to create a smart home ecosystem to its integration and reintegration within Google, highlighting the challenges of aligning startup innovation with the objectives of a tech giant. The hosts also touch on the broader market of smart home technology, noting Google's delayed response to competing products like Amazon's Alexa. With Nest's founders Tony Fadell and Matt Rogers now departed, the episode reflects on the company's evolution and its role in shaping the future of home automation.

Summary Notes

Impact of Color on the Brain

  • Color can influence brain function and behavior.
  • Technology companies utilize psychological expertise to leverage this effect.

The color really does have an impact on your brain.

The quote highlights the psychological influence of color, which is significant enough that tech companies invest in understanding and using this effect to their advantage.

Introduction to Acquired Podcast Season Two, Episode Three

  • Hosts Ben Gilbert and David Rosenthal introduce the episode focusing on Google's acquisition of Nest in 2014.
  • They acknowledge the high volume of research and listener requests for this topic.
  • The timing is notable due to Google's recent decision to integrate Nest into its main hardware business.

Welcome to season two, episode three of acquired, the podcast about technology acquisitions and ipos. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts.

The quote introduces the hosts and the podcast, which covers technology acquisitions and IPOs, setting the stage for the episode's discussion on Google and Nest.

Google's Acquisition of Nest

  • The acquisition of Nest by Google had multiple phases, including the original purchase, its operation as an Alphabet standalone unit, and reintegration into Google.
  • A significant related transaction was the $500 million acquisition of Dropcam by Nest.
  • The episode focuses on the initial acquisition where Google transferred funds directly to Nest shareholders.

Yeah, I mean, the question is, which Nest acquisition or divestiture is this officially going to be about? Because there was the original acquisition, the rolling out into a standalone unit of Alphabet, and now the reacquisition back into Google.

The quote discusses the various stages of Nest's relationship with Google and Alphabet, indicating the complexity and evolving nature of the acquisition.

Podcast Apps and Listener Engagement

  • The hosts discuss experimenting with new podcast apps like Breaker to enhance listener engagement and discoverability.
  • They encourage listener comments and reviews to gauge the impact on the podcast's visibility.
  • The Acquired community is invited to join the discussion on Slack.

A couple of announcements for listeners before we dive in... please comment on this episode... we're experimenting with how the rise of social podcast apps sort of affects discoverability...

The quote reflects the hosts' efforts to engage with their audience and understand the role of social podcast apps in increasing the podcast's reach.

Sponsorship: Pilot for Startups and Growth Companies

  • Pilot is a partner of the Acquired podcast, offering accounting, tax, and bookkeeping services to startups and growth companies.
  • The firm emphasizes outsourcing non-core activities to focus on what enhances the company's value proposition.
  • Pilot has grown into a major accounting firm backed by prominent investors and serves a variety of successful companies.

Our next sponsor for this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds.

The quote introduces Pilot as a sponsor, highlighting its services and significance in the startup ecosystem.

Follow-up on Apple Beats Episode

  • The hosts address feedback from a listener named Devin about the omission of Dr. Dre's history of assault, particularly against women, in the previous episode on Apple's acquisition of Beats.
  • The hosts acknowledge the importance of considering the full personal history of public figures they discuss.
  • They commit to a more holistic approach to discussing founders and executives in the future.

...listener Devin wrote into us about something that we didn't talk about in the Apple Beats story, and that's that Dr. Dre has a history of assault back in his earlier days with NWA, and in particular assault and violence towards women...

The quote is an acknowledgment of the oversight in the previous episode and a commitment to address such issues more comprehensively in the future.

Tony Fadell's Background and Role in Nest

  • Tony Fadell is known as the "father of the iPod" and co-founder of Nest.
  • His early influences included his grandfather, who encouraged him to tinker with technology.
  • Fadell's entrepreneurial ventures began in college, where he launched a successful education software company.
  • His career included notable stints at General Magic and Philips, where he attempted to develop connected PDAs.
  • Fadell joined Apple and played a pivotal role in the development of the iPod.

...the person I'm referring to is the quote, unquote, father of the ipod, Tony Fadell...

The quote introduces Tony Fadell, emphasizing his significant contributions to technology, particularly at Apple, and setting the stage for his later involvement with Nest.

Matt Rogers's Background and Role in Nest

  • Matt Rogers interned at Apple's iPod team and impressed Tony Fadell with his work ethic and dedication.
  • After graduating, Rogers returned to Apple and worked closely with Fadell on the iPod and later on the iPhone projects.
  • Rogers's early experiences at Apple shaped his approach to product design and entrepreneurship.

The iPod team hires an intern from Carnegie Mellon who shows up in, I think this was 2005, and it's Matt.

The quote introduces Matt Rogers, highlighting his beginnings as an intern at Apple and foreshadowing his future partnership with Tony Fadell at Nest.

Early Development of iPhone

  • Apple had two internal teams working on different iPhone concepts, codenamed Purple One and Purple Two.
  • Tony Fadell's team worked on incorporating iPod hardware and software into a phone.
  • Scott Forstall's team worked on shrinking OS X to fit onto a phone-sized device.
  • Tony's approach used the iPod's click wheel as the primary interface, while Scott's team developed the touch interface.
  • The rivalry between the two teams was intense and well-known after interviews conducted around the iPhone's 10th anniversary.

"And then competing within the company. Steve also had Scott Forstall take OS Ten and try and shrink that down to fit it onto something the size of a phone."

The quote explains the internal competition at Apple to create a phone, highlighting the project to adapt OS X for a mobile device.

Interface Innovation at Apple

  • Apple's history of interface innovation is notable, with the iPod's click wheel and the iPhone's multi-touch interface.
  • The click wheel and multi-touch were both revolutionary, changing how people interact with technology.
  • Apple's repeated success in interface innovation is rare among companies.

"It's multi-touch. They invented this incredible capacitive touch thing that is like the dominant way that people interact with technology now..."

This quote emphasizes the significance of Apple's multi-touch technology and its widespread impact on user interaction with devices.

Corporate Rivalry and Departure from Apple

  • Tony Fadell removed from Steve Jobs' favorites during an iPhone demo, foreshadowing his departure.
  • Tony Fadell and his wife left Apple due to the intense rivalry and to focus on their family.
  • They built a vacation home in Tahoe and traveled extensively, including buying an apartment in Paris.
  • Tony was dissatisfied with the products for his home and saw an opportunity for improvement.

"Within the next couple of months, Tony is gone from Apple."

The quote suggests that Tony Fadell's departure from Apple was imminent following the internal competition and his removal from Steve Jobs' favorites list.

Founding of Nest

  • Tony Fadell and his former intern, Matt Rogers, decided to start a company focused on home technology.
  • Their shared experiences with home renovations and desire for energy efficiency led to the creation of Nest.
  • Nest aimed to reinvent home products, starting with thermostats, and eventually build a connected home operating system.
  • The company was named "Nest" based on the concept of a home, inspired by the MTV show "Cribs."

"So Matt leaves Apple at this point, rents, of course, a garage in Palo Alto, and starts tinkering on stuff."

This quote illustrates the early entrepreneurial efforts of Nest's co-founders, reminiscent of the classic Silicon Valley startup story.

Nest's Early Growth and Google's Interest

  • Nest launched the Nest Learning Thermostat, which gained significant buzz and investment.
  • Google showed early interest in acquiring Nest, but the company initially declined.
  • Nest's vision of the smart home was revolutionary at the time, despite skepticism from the media.

"Sergey Brin, the Google co-founder, sees an early demo and an early version of thermostat and apparently he's blown away."

The quote highlights Google's early recognition of Nest's potential in the smart home market.

Nest's Acquisition by Google

  • Google acquired Nest for $3.2 billion in 2014, with Nest remaining independent.
  • The acquisition included terms for significant financial resources and independence for five years.
  • Nest's valuation was largely based on expected synergies with Google, not on current cash flows.

"Nest is to remain wholly independent... This is going to be like YouTube."

The quote indicates that Nest was to operate independently within Google, similar to YouTube's structure post-acquisition.

Challenges and Acquisitions Post-Google Acquisition

  • Nest faced a recall of its Nest Protect product due to a disabling feature.
  • The acquisition of Dropcam led to cultural clashes and management disputes.
  • Greg Duffy, Dropcam's founder, publicly criticized Nest's management after leaving the company.

"They have to recall all the units that are on the shelves at all their retail partners."

This quote highlights the serious issue Nest faced with their Nest Protect product, leading to a recall and damaged reputation.

Hiring of Ruth Porat as Google CFO

  • Ruth Porat joined Google as CFO, bringing financial discipline.
  • Her arrival coincided with the restructuring of Google into Alphabet.
  • Porat's hiring led to changes in the agreements between Nest and Google.

"First, they hire Ruth Porat to join as CFO. And Ruth had been CFO of Morgan Stanley before coming to Google. And a big part of Ruth's coming, as was talked about, and I think it's played out in practice, is bringing a lot more structure to Google and particular financial discipline."

The quote indicates that Ruth Porat's hiring was significant for Google, as she was expected to introduce greater structure and financial discipline, which indeed played out in practice. Porat's role was part of the broader restructuring that would lead to the formation of Alphabet and changes in Nest's relationship with Google.

Nest's Integration and Independence Post-Acquisition

  • Nest had agreements for a five-year runway and financial independence, which were changed post-Alphabet restructuring.
  • Nest became an independent company under Alphabet, losing its previous financial autonomy.
  • Incentives were in place to retain the management team and key engineers at Nest post-acquisition.

"Now, apparently when that happens, all of those agreements between Nest and Google got redone. So the five-year runway, the lack of financial accountability, if it existed in the first place, it certainly doesn't anymore once Nest gets pushed out as its own independent company under Alphabet."

This quote explains that the restructuring into Alphabet led to a renegotiation of Nest's agreements with Google, resulting in the loss of the five-year runway and financial independence that Nest initially had. It highlights the shift in Nest's status within the Alphabet corporate structure.

Nest's Struggles and Management Issues

  • Alphabet considered selling Nest due to its inability to ship products and realize its vision.
  • Tony Fadell, co-founder of Nest, was unhappy but stayed due to retention incentives.
  • Fadell also worked on the Google Glass team during this period.
  • Nest faced internal leadership issues, leading to an NLRB complaint and Fadell's eventual departure.

"And then the next month, in June 2016, Tony finally leaves Nest."

This quote marks the departure of Tony Fadell from Nest amidst the company's struggles and internal issues, which included leadership problems and a labor complaint. Fadell's exit was a significant turning point for Nest.

Nest's Turnaround and New Leadership

  • Marwan Fawaz replaced Tony Fadell as CEO of Nest.
  • Fawaz's background in the cable industry and Motorola provided relevant experience.
  • Nest started integrating more with Google, launching new products like Nest Cam IQ and Nest Secure.

"So they bring on a new CEO, Marwan Farwaz, to replace Tony. And Marwan came actually first from the cable industry, but then he was part of Motorola, and part of Motorola when Google owned Motorola."

This quote introduces Marwan Fawaz as the new CEO of Nest, highlighting his experience in the cable industry and at Motorola, which was previously owned by Google. His leadership is noted as the beginning of a turnaround for Nest.

Google Home and Nest's Product Development

  • Google Home was launched as a competitor to Amazon Echo, separately from Nest.
  • Nest released new products including outdoor cameras and a smart doorbell, leveraging Google's machine learning technology.
  • Yoki Matsuoka, Nest's VP of Technology, left for Apple but returned to Nest as CTO.

"Google itself launches Google Home in late 2016, which is their Echo, Amazon Echo and Alexa competitor now, interestingly, totally separate from Nest."

This quote points out the launch of Google Home, which was developed independently of Nest, despite both being under the Alphabet umbrella. It signifies Google's strategic move into the smart home market, competing directly with Amazon's Echo.

Nest's Financial Performance and Google's "Other Bets"

  • Nest hit a revenue target of $300 million in 2015, including Dropcam revenue.
  • Despite growing revenue, Nest and other Alphabet "Other Bets" continued to operate at a loss.
  • Nest contributed significantly to the revenue of Google's "Other Bets" category.

"So I mentioned there was a mark that Nest was supposed to hit that was $300 million a year in revenue. In 2015, they did hit that."

This quote discusses Nest's financial performance, specifically meeting a significant revenue target in 2015. It reflects on the financial goals set for Nest and its impact on Alphabet's broader financials, especially within the "Other Bets" category.

Nest's Reintegration into Google

  • Nest was reacquired by Google from Alphabet in 2018, aiming for tighter integration with Google's hardware team.
  • Matt Rogers, Nest's co-founder, left the company following the reintegration.
  • Tony Fadell moved to Paris, starting his own venture investing practice, and expressed anti-Silicon Valley sentiments.

"In the first week of February in 2018, there is an announcement that Nest is getting acquired again. It's just getting acquired by Google, moving from a wholly separate division under Alphabet in the other bets category, being integrated back into Google as part of the hardware team led by Rick Ostelo."

The quote signifies Nest's reintegration into Google, moving it from a separate division under Alphabet to being part of Google's hardware team. This strategic shift was intended to foster closer collaboration and integration between Nest's products and Google's hardware efforts.

Amazon's Approach to Building Ecosystems

  • Amazon's early team for Alexa, including the Echo team, originated from AWS.
  • The vision was not to create a standalone product but to establish a comprehensive computing ecosystem.
  • Amazon's approach was holistic, incorporating devices like Kindle and leveraging the entire Amazon ecosystem.

"And he came from AWS and a lot of the early Alexa team and Echo team came from that part of the company, not to mention the Kindle and the devices and then all of Amazon's whole ecosystem. It wasn't like, we're going to make a point product, it was from the beginning. This is a computing ecosystem."

The quote emphasizes Amazon's strategy of building products as part of a larger computing ecosystem rather than as isolated offerings. It highlights the integration of various parts of the company, including AWS and Kindle, to create a cohesive user experience.

Google and Facebook's Strategy with Acquisitions

  • Google and Facebook opted to buy companies like Oculus and maintain their independence.
  • The discussion suggests that this strategy may not be conducive to achieving the goal of creating a unified ecosystem.

"And so for Google and Facebook with Oculus to then buy these companies and leave them independent to me is like when this is the goal, is not the right way to do it."

The quote critiques Google and Facebook's strategy of acquiring companies but allowing them to operate independently, suggesting that it may not be the most effective approach to building a cohesive ecosystem.

The Evolution of Computing Ecosystems

  • Computing ecosystems often emerge after a company has already established a foothold with previous innovations.
  • Examples include Microsoft's Windows following DOS and Apple's iPod as a precursor to its broader ecosystem.
  • Google and Facebook evolved into platform companies, starting with products built on existing platforms like the web.

"It's often the second or third swing is when you take a new ecosystem."

This quote highlights the pattern that successful computing ecosystems are usually not a company's first product but come after initial success in the market.

The Importance of Early Head Starts

  • Amazon's early investment in Alexa provided a significant advantage over competitors like Google Home.
  • The sales figures and market penetration of Alexa-enabled devices underscore Amazon's lead.
  • The integration of Alexa with third-party devices has become widespread.

"From Google Home. There was a 2017 report in September that there was about 20 million echoes that had been sold, versus about 7 million Google homes."

This quote provides a concrete example of Amazon's early lead in the smart home market, with sales figures illustrating the advantage of being an early mover.

Sonos's Strategy and Ecosystem Flexibility

  • Sonos's decision to support multiple ecosystems, including Alexa and Google Home, is described as a strategic move to be like "Switzerland."
  • This approach allows users to choose between different ecosystems without being locked in.

"So personally I'm not willing to make the bet yet on it's funny how Sonos lets you hedge because they are going to be rolling out Google home."

The quote discusses Sonos's strategy to remain neutral by supporting multiple ecosystems, allowing users to hedge their bets on which platform will dominate.

The Impact of Acquisitions on Company Strategy

  • The acquisition of Nest by Google is compared to the acquisition of Android, highlighting the potential for strategic realignment within the parent company.
  • The discussion considers whether earlier integration of Nest into Google could have led to a more effective response to Amazon's Alexa.

"If Google had acquired Nest in 2011, it would have been a very similar playbook to when they acquired Android in 2005."

This quote draws parallels between Google's acquisition of Nest and its earlier acquisition of Android, suggesting that similar strategic opportunities could have been leveraged with Nest.

The Difficulty of Building Independent Platforms

  • Building a platform as an independent company is challenging.
  • The conversation suggests that even successful companies with innovative products struggle to exist independently without the support of a larger ecosystem.

"Clearly, none of them can exist as independent companies."

This quote underscores the difficulty of sustaining an independent platform company without the backing of a larger ecosystem or parent company.

The Role of Hardware, Software, and Services in Computing Platforms

  • The integration of hardware, software, and services is crucial for computing platforms.
  • The quote from Steve Jobs, "if you really care about software, you care about hardware," reflects the intertwined nature of these components.

"It's not just software, it's not just hardware, it's not just services. It's all three altogether."

This quote encapsulates the idea that successful computing platforms require a harmonious blend of hardware, software, and services.

The Stairstep Approach for Startups

  • Startups should focus on products with network effects before attempting to build platforms.
  • This strategy has been employed by companies like Google, Facebook, Microsoft, and Apple.
  • The discussion includes the example of Snapchat leveraging its app's network effect to potentially build a broader platform.

"You can't start with the platform in mind, but you can start with a product and a product that has a network effect, and then you can use that to then in the next generation bridge into the platform."

The quote advises startups on the importance of beginning with a network effect product before transitioning to a platform, following the footsteps of successful tech giants.

The Timing of Innovation in Smart Home Technology

  • The conversation explores why smart home technology has become popular now, as opposed to earlier attempts.
  • Factors such as the smartphone revolution and the concept of learning devices are considered to be enablers of current smart home adoption.

"I think one piece of the positioning and functionality that nest got really right was this idea of being a learning smart home device, not a smart home device."

This quote highlights the importance of timing and the right feature set, such as learning capabilities, in the success of smart home technology like Nest.

Grading Google's Acquisition of Nest

  • The acquisition of Nest by Google is critiqued for being financially and strategically questionable.
  • The discussion reflects on the missed opportunities and slow response to Amazon's Alexa.

"I think this is a d."

This quote represents the speaker's negative assessment of Google's acquisition of Nest, considering it a poor strategic move in hindsight.

Final Thoughts on the Episode

  • The episode concludes with a reflection on the topics discussed, including the importance of strategic acquisitions and the challenges of competing in the smart home market.
  • The hosts share their personal "carve outs," recommending content that interests them outside the main discussion.

"Nest. Nest in 90 minutes or less."

This quote wraps up the episode, summarizing the extensive discussion on Nest and its role within the broader technology landscape.

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