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With a string of deals the internet giant has positioned itself to become a big
inventor, and reinventor, of hardware
Jan 18th 2014 | SAN FRANCISCO
AT GOOGLE they call it the toothbrush test. Shortly after returning to being
the firm s chief executive in 2011, Larry Page said he wanted it to develop
more services that everyone would use at least twice a day, like a toothbrush.
Its search engine and its Android operating system for mobile devices pass that
test. Now, with a string of recent acquisitions, Google seems to be planning to
become as big in hardware as it is in software, developing toothbrush
products in a variety of areas from robots to cars to domestic-heating
controls.
Its latest purchase is Nest Labs, a maker of sophisticated thermostats and
smoke detectors: on January 13th Google said it would pay $3.2 billion in cash
for the firm. Google s biggest move into hardware so far is its $12.5 billion
bid for Motorola Mobility, a handset-maker, in 2011. In recent months it has
been mopping up robotics firms (see table), most notably Boston Dynamics, which
makes two- and four-legged machines with names like BigDog and Cheetah that can
walk and run. Google s in-house engineers have also been busy working on
driverless cars and wearable gadgets such as Google Glass.
Nest takes Google into the home-appliance business, which is how another, much
older American conglomerate got started. General Electric (GE) produced its
first electric fans in the 1890s and then went on to develop a full line of
domestic heating and cooking devices in 1907, before expanding into the
industrial and financial behemoth that is still going strong today.
The common factor shared by GE s early products was electricity, something
businesses were then just learning to exploit. With Google s collection of
hardware businesses, the common factor is data: gathering and crunching them,
to make physical devices more intelligent.
Even so, the question is whether Google can knit the diverse businesses it is
developing and acquiring into an even more profitable engineering colossus or
whether it is in danger of squandering billions. Concern that the firm could
make overpriced acquisitions has grown along with the size of its cash pile,
now around $57 billion. Eyebrows were raised this week when the price for Nest
was revealed. Morgan Stanley, a bank, reckons it represents ten times Nest s
estimated annual revenue. (Google s executive chairman, Eric Schmidt, is a
non-executive director of The Economist Group.)
Why fork out so much for a startup that makes such banal things as thermostats?
Paul Saffo of Discern Analytics, a research firm, argues that Google is already
adept at profiting from the data people generate in the form of search queries,
e-mails and other things they enter into computers. It has been sucking in data
from smartphones and tablet computers thanks to the success of Android, and
apps such as Google Maps. To keep growing, and thus to justify its shares
lofty price-earnings ratio of 33, it must find ever more devices to feed its
hunger for data.
Packed with sensors and software that can, say, detect that the house is empty
and turn down the heating, Nest s connected thermostats generate plenty of
data, which the firm captures. Tony Fadell, Nest s boss, has often talked about
how Nest is well-positioned to profit from the internet of things a world in
which all kinds of devices use a combination of software, sensors and wireless
connectivity to talk to their owners and one another.
Other big technology firms are also joining the battle to dominate the
connected home. This month Samsung announced a new smart-home computing
platform that will let people control washing machines, televisions and other
devices it makes from a single app. Microsoft, Apple and Amazon were also
tipped to take a lead there, but Google was until now seen as something of a
laggard. I don t think Google realised how fast the internet of things would
develop, says Tim Bajarin of Creative Strategies, a consultancy.
Buying Nest will allow it to leapfrog much of the opposition. It also brings
Google some stellar talent. Mr Fadell, who led the team that created the iPod
while at Apple, has a knack for breathing new life into stale products. His
skills and those of fellow Apple alumni at Nest could be helpful in other
Google hardware businesses, such as Motorola Mobility.
Google has said little about its plans for its new robotics businesses. But it
is likely to do what it did with driverless cars: take a technology financed by
military contracts and adapt it for the consumer market. In future, personal
Googlebots could buzz around the house, talking constantly to a Nest
home-automation platform.
The challenge for Mr Page will be to ensure that these new businesses make the
most of Google s impressive infrastructure without being stifled by the
bureaucracy of an organisation that now has 46,000 employees. Google has had to
overcome sclerosis before. Soon after returning as boss, Mr Page axed various
projects and streamlined the management.
Nest is being allowed to keep its separate identity and offices, with Mr Fadell
reporting directly to Mr Page. Google has also protected its in-house hardware
projects, such as Google Glass and self-driving cars, from succumbing to
corporate inertia by nurturing them in its secretive Google X development lab.
It has also given its most important projects high-profile bosses with the
clout to champion them internally. The new head of Google s robotics business
is Andy Rubin, who led the successful development of Android.
Such tactics are good ways to avoid the pitfalls of conglomeration. But to
ensure success, Google will need to avoid another misstep. Its chequered record
on data-privacy issues means that Nest and other divisions will be subject to
intense scrutiny by privacy activists and regulators. Provided it can retain
the confidence of its users on this, Google should be able to find plenty of
new opportunities in both software and hardware that pass the toothbrush test
and keep a bright smile on its shareholders faces.
From the print edition: Business