With Google announcing yesterday that it acquired the Tony Fadell-led Nest Labs for a cool US$3.2 billion, an emerging narrative is that Google caught Apple asleep at the wheel. For many who keep a close eye on tech, an Apple/Nest Labs acquisition seemed like a match made in heaven. I myself was quick to hop on this bandwagon, writing yesterday:
[There's a] commonly held view that Nest Labs was an Apple acquisition just waiting to happen. Nest's Thermostat was largely viewed as an Apple-esque product insofar that it simplified what was otherwise a cumbersome and confusing activity. It may sound absurd, but the Nest Thermostat really worked to make home temperature automation seem cool, and more importantly, approachable. Given that Fadell has deep roots at Apple and that home automation via mobile devices is becoming more prevalent, many assumed, or perhaps hoped, that if any company were to acquire Nest it'd be Apple.
But the more I thought about it, the more it became clear to me that Apple purchasing Nest, especially for billions of dollars, just didn't make a whole lot of sense.
Because Google and Apple are such fierce competitors, and because Apple is waging an all-out proxy war against Google via its ongoing legal battles with Samsung, it's only natural to assume that a notable Google acquisition is a de-facto Apple loss.
The reality is much more nuanced.
Nest products won't help drive more iOS sales
Apple has tens of billions of dollars in the bank, a handsome sum primarily derived from good, old-fashioned hardware sales. Even software titles that used to generate cash flow for Apple are now given away for free to the masses, with OS X Mavericks being the most obvious example.
To that end, it's hardly novel to state that Apple's software business exists to drive hardware sales. As a result, Apple is exceedingly concerned with ensuring that its software remains intuitive, powerful and a step above the competition.
Consequently, Apple isn't interested in getting into the thermostat or smoke detector business.
What really lights Apple's fire is making sure that iOS is so big, so prevalent and so important that hardware and peripheral manufacturers from all over the map view iOS integration as a necessity.
There's no denying that Nest Labs is doing some really cool work and has already put out two really great and forward-thinking products in just three years time. And again, there's no denying that Nest's products have a distinctive Apple-y vibe to them, a fact which shouldn't come as much of a surprise given that the company was co-founded by two highly regarded Apple alums.
That notwithstanding, assume for a second that Apple was the company that purchased Nest Labs. Now what? Now Apple all of a sudden finds itself selling thermostats and smoke detectors. And it paid $3.2 billion for that privilege? Where's the win there?
Put simply, would a Nest Labs acquisition ultimately have helped Apple sell more iOS devices than before?
I don't see it.
In stark contrast, Apple's cheap-by-comparison $356 million acquisition of Authentec directly led to Touch ID, the flagship feature on the iPhone 5s.
Hardware sales-wise, Nest Labs would be a micro hobby to Apple
Fadell has said that the Nest Thermostat is in nearly 1 percent of US homes. Not too shabby. But Apple in its most recent quarter sold 33.8 million iPhones. That figure is equivalent to 10.6 percent of the entire US population (33.8 million iPhones per 317 million people).
Apple is a huge company, so much so that it still considers the venerable Apple TV a hobby, even though it has cumulatively sold more than 13 million units, with the majority of those sales having occurred since 2013. So while Nest has some great products, its product line would be nothing more than a micro hobby for a company as big and profitable as Apple.
Apple already has and will likely continue to have the benefits of Nest/iOS product integration
Home automation and internet-connected devices are becoming more of a reality with each passing month. Consequently, Apple's doesn't need Nest's products under its umbrella when they already interface with iOS.
Of course, it's only natural for cynics to ask, "Well sure, how long is that going to last?"
Addressing that very question, Fadell, the iPodfather himself, explained in an interview with The Verge that we have nothing to worry about:
Well look, at the end of the day, customer choice is essential. And we don't make products that compete with Apple, nor make products that compete with Google. Our customers come in both iOS and Android flavors, and I hope our customers can still buy the products they want to purchase wherever they want to purchase them.
And sure, you can question Fadell's sincerity of Larry Page's intentions if you want, but Google would be a fool if, at some point down the line, it made Nest products that didn't play nicely with iOS. If anything, history suggests that Google wants to be part of the iOS ecosystem while Apple is the company overly concerned and paranoid about sleeping with the enemy. Perhaps Google Voice rings a bell?
Ponder this question: What type of person would buy a thermostat or smoke detector first and then base a subsequent smartphone purchasing decision on compatibility issues?
The short of it is that as long as Apple continues to sell iPhones faster than they can make them, Nest on iOS isn't going anywhere anytime soon.
$3.2 billion for a lone company? That's not something Apple does
Another reason why an Apple/Nest acquisition doesn't add up is because, quite frankly, it just doesn't add up. Google is paying $3.2 billion for Nest Labs, an astronomical amount for a company as stingy as Apple.
For some context, Apple's most expensive acquisition to date was the $404 million it paid to acquire NeXT (and Steve Jobs).
Now if we take a look at Apple's 10 most expensive acquisitions with a publicized purchase price, here's what we come up with.
NeXT - $404 million
Power Computing - $100 million
P.A. Semi - $278 million
Quattro Wireless - $275 million
Intrinsity - $121 million
C3 Technologies - $267 million
Anobit - $390 million
AuthenTec - $356 million
PrimeSense - $345 million
Topsy - $200 million
Taken together, that comes out to $2.7 billion. And for you currency sticklers out there, note that eight of the above 10 acquisitions were made after 2010. Point being, even if we look at Apple's older acquisitions in today's dollars, Google's $3.2 billion purchase price is still astronomical by Apple's standards.
Let's hail Google, not rag on Apple
With an acquisition as big as this, and one involving quite a number of former Apple employees no less, it's only natural to reflexively ask, "Should Apple have acquired Nest?" For the reasons listed above, I don't think such an acquisition would have made much sense. Indeed, re/code reported last night that "Google was the only serious bidder and Apple was not in the mix."
That said, I think you have to give props to Google for plunking down $3.2 billion for an inventive company with a creative and talented executive team. Whatever Google has in mind, one can only surmise that it has to be big given the large purchase price. For those keeping score at home, the Nest acquisition is Google's second most expensive to date, only trailing its $12.5 billion acquisition of Motorola Mobility back in 2011.
I think it's important, and undeniably interesting, to have a company like Google so focused on cool technology that it has no shame in releasing products first, no matter how shaky, random or unprofitable, and asking questions later. Google Glass, anyone?
I mean, Google this past December acquired Boston Dynamics, a company renowned for building pretty jaw-dropping futuristic robots. And now Google has spent a boatload of cash to acquire Nest Labs. Who the heck knows what Google's product roadmap looks like these days, but you can safely bet that they have some interesting ideas in the works.
Apple undoubtedly does too, but $3.2 billion for a company that sells sleek thermostats and smoke detectors just doesn't coalesce with Apple's DNA. It does with Google's.
Interesting hypothetical -- What if Microsoft bought Nest?
Imagine for a second that Microsoft, and not Google, acquired Nest Labs for $3.2 billion. Would the discourse be any different?
I think it's reasonable to assume that if the leader-less folks up in Redmond spent $3.2 billion on Nest, they'd be lampooned for overpaying.