Why has Google spent £2bn on thermostats?

3rd February 2014

Rather than writing about the week’s big news – IPG’s much commented upon purchase of Profero – I thought that it might be more interesting to look at another massive deal, which arguably has far bigger ramifications in the long to medium term, and which may be the most important, far-reaching deal we have ever written about in our 18 months at The Drum.

This was the purchase, last week, by Google, of the thermostat maker Nest Labs for $3.2bn (about £2bn). A lot of friends and acquaintances asked me why on earth a tech-savvy internet giant like Google, which makes its money from advertising, be interested in a company that makes something as old fashioned, and as prosaic, as thermostats?

On the face of it, it’s a fair question – the deal was bizarre to casual observers; indeed, to virtually everyone except insiders or tech buffs with an eye to the future.

First of all, to understand why this deal happened, you need to look at the two companies involved. First of all, Google isn’t just a search engine, or even a company that makes its money from advertising. What it really makes its money from is data. Similarly, Nest (founded by two former Apple employees) isn’t just a company that makes thermostats, it makes smart thermostats that collect data on their owners’ behaviour. This means that householders no longer need to faff about programming thermostats, as the kit does everything for them. Nest also makes cloud-connected smoke and carbon monoxide detectors, and has a very nifty portfolio of apps.

And it should be remembered that Google is no longer just a software company with a set of super-smart algorithms. Like its great rivals Apple and Microsoft (and to a lesser degree Amazon), it also has a substantial hardware business in the shape of phone-maker Motorola; although hardware for Google has always been a cost, not a profit centre – it buys hardware either for patents or IP reasons or so that it can get its algorithms, data crawlers and OSes to more users.

But I’m betting that Google, which is run by some of the smartest people on the planet, wasn’t just looking at buying a collection of apps and connected products; it wasn’t even looking at new ways to collect data (although it’s a dead cert that it will try to do this). No, the reason why Schmidt, Page, Brin and co splashed out £2bn was to stake a claim on what will be the biggest thing over the next decade or so – the so-called “Internet of Things”, or IoT.

The IoT has been around as an idea for just five years, but most analysts are convinced that it will transform daily life for those of us here in the developed world. Although there’s no widely-understood or accepted definition of what it actually is, IoT essentially it involves identifying or tagging devices, objects (or even, in some kind of Orwellian nightmare, people) and connecting them together intelligently.

So, for example, everything you buy in the supermarket is logged while you shop, and again when you get home and put your purchases in the cupboard or fridge. So you would be notified if you were running low on milk, cornflakes or organic truffle oil. Or your car, which knows your driving habits intimately, would be able to tell you when to fill up the petrol, tank, based on the nearest garage with the lowest price per litre – thus making for cheaper and more efficient motoring.

But the implications and uses of this go far further – tech utopians envisage a world without waste, want or waiting; while those of a dystopian bent fret about a loss of privacy or autonomy. For others, security breaches are an even bigger concern – how do you keep all this data safe, and prevent its use or misuse by ne’er do wells?

The IoT isn’t far away. South Korea is already the most wired nation on earth, and they’re building a “smart city” called Songdu, a metropolis of smart homes filled with devices designed to be wired, connected and turned into a constant stream of data that would be monitored and analysed by an array of computers with little, or no human intervention.

And the IoT may be very big – the tech analyst Gartner estrimates there will be 26bn interconnected devices in the IoT by 2020, while ABI Research believes it will be 30bn by the same date. Another analyst, Piper Jaffray’s Gene Munster, reckons the IoT market will be worth upwards of $40bn within seven years.

But most significantly for our purposes here, the IoT will be the biggest thing to have happened in marketing communications since the internet; maybe since the TV advert; or even, ever.

Think about it – you walk into, say, Gap, and the store, based on your previous shopping habits sends you, via your phone, or through an electronic “billboard” in the store, a personalised ad of the latest offers, tailored exclusively for you. It’s that famous scene in the movie Minority Report made reality. “Broadcast” advertising (ie aimed at a group of people or a broad, coarsely differentiated audience) as we know it, in the press, on posters or in the papers, and on the net, becomes extinct.

Leaving aside the concerns outlined above – that’s a huge debate, which we don’t have space for here – the big question is: who controls the space? At the moment nobody does, but Google has planted its flag, signalling its intention that Android and its descendants, and not iOS, Windows or any other system, will be in charge.

Earlier this month it set up the Open Automotive Alliance (OAA), which also includes big car makers, like GM, Audio, Hyundai and Honda, to power the dashboards of cars with its Android operating system (Android already has a billion users, it should be noted). Apple (with its iOS In The Car project), and Microsoft (whose software is used in new Ford, Fiat and Nissan cars) have also thrown their hats into the ring, but they’re both trailling Google in terms of interconnectivity. Google envisions (to give but one example) a car that on cold days will warm itself up 10 minutes before the driver is due to set off for work, and which will turn the central hating on at home when the driver is 15 minutes’ away from the house on his or her journey home.

So, with the Nest purchase, Google isn’t just building a portfolio of smart devices, it’s building an ecosystem. And this ecosystem, and the data it provides, will be of huge interest to advertisers. And that – not through sales of thermostats or other bits of hardware – is where the boys from Mountain View will add to their already substantial billions