Google buys Nest Labs for $3.2B to get foothold in Internet of Things

January 14, 2014 | By Phil Goldstein

Google (NASDAQ:GOOG) paid $3.2 billion to acquire Nest Labs, a maker of smart thermostats, smoke alarms and other home gadgets, grabbing a foothold in the smart home and Internet of Things markets. The size of the acquisition, while not on the same scale as Google's $12.4 billion deal for Motorola Mobility, indicates Google's desire to establish itself in a market that may be one of the next frontiers of computing and Internet access.

Net was launched in 2011 by Apple (NASDAQ:AAPL) iPod creator Tony Fadell. According to Re/code, which cited unnamed sources familiar with the matter, Google was the only serious bidder for Nest and Apple was not in the mix.

"Nest's founders, Tony Fadell and Matt Rogers, have built a tremendous team that we are excited to welcome into the Google family," Google CEO Larry page said in a statement. "They're already delivering amazing products you can buy right now--thermostats that save energy and smoke/CO alarms that can help keep your family safe. We are excited to bring great experiences to more homes in more countries and fulfill their dreams!"

The Nest Learning Thermostat is perhaps the company's best-known product, and has been featured in smart home demos by Verizon Wireless (NYSE:VZ) and other carriers. In a company blog post, Fadell noted that Nest has partnerships with some of the largest energy companies in the country, has a team of 25,000 certified professionals who help install Nest in the U.S. and Canada, and the company has more than 300 employees spread across three countries.

"So if things are going so well, why did we decide to partner with Google?" he wrote. "Google will help us fully realize our vision of the conscious home and allow us to change the world faster than we ever could if we continued to go it alone. We've had great momentum, but this is a rocket ship."

Google Ventures has been one of Nest's backers, and Fadell related how at the 2011 TED Conference, Nest showed Google co-founder Sergey Brin a video and an early model of the Nest Learning Thermostat. "He instantly got what we were doing and so did the rest of the Google team when we showed them," Fadell recounted.

Analysts said the deal pointed to how important the Industrial Internet--one aspect of the Internet of Things based around home appliances and other goods--will be in the years ahead. "The Industrial Internet may not be as sexy as the latest smart watch, but there's huge amount of money to make from devices, applications, connectivity and services," MachNation analyst Steve Hilton said. "These solutions can bring the communications to billions of electromechanical devices in our world."

"The Nest acquisition by Google is yet another validation point that the Internet of Things (IOT) sector has graduated far beyond its startup phase," Gilad Meiri, IoT industry expert and CEO of Neura, said in a statement. "Google has made an art out of deeply understanding how people interact with their virtual world, the Web, and in so doing has been able to monetize that understanding in wildly successful ways. This acquisition is the first of what we see as potentially many next steps by Google and others to further understand the vast amounts of data representing how people interact with their physical world."