Feb 11, 2014

Google NEST – a case of déjà vu?

Almost 10 years ago, Amazon formed a team to work on a groundbreaking, highly integrated consumer product. Amazon began with a goal of improving the user experience surrounding physical books. The initiative was led by Gregg Zehr who brought considerable pedigree having previously been the VP of Hardware Engineering at Palm Computing.

The new team was set up outside of Amazon and its strategic objective was complementary to Amazon's mainstream activities. This was the genesis of Amazon’s Lab126, a start-up that focused on product innovation around a new generation of connected devices. Amazon's connected device road map has progressed from the connected eReader to tablets. Most recently, Amazon’s Kindle has been talked about as a point-of-sale device.

If we fast-forward to the present day, it is difficult to escape a sense of déjà vu when looking at Google’s acquisition of NEST. Here we have a separate entity with core competencies in creating highly aesthetic consumer products, led by executives with a strong Apple-design pedigree. And, according to Google’s CEO Larry Page, Google and NEST are “excited to bring great experiences to more homes in more countries”.

However, relative to Amazon's start-up costs ten years ago, it seems that the entry cost for a new category of innovation in the connected devices arena has gone up to the order of a few billions dollars!

So what did Amazon accomplish with Lab126? What might we expect from Google/NEST? And, what does this mean for companies that can’t afford billion dollar initiatives?

When it was eventually launched in 2007, Amazon’s Kindle eReader delivered several breakthrough innovations. Firstly, it redefined the mobile data paradigm and in more ways than one.

Take the simple issue of pricing. For the end user, this was based on the purchase price of a book. At $9.99 for a novel, consumers no longer had to perform mental gymnastics concerning mobile data MBytes. Equally remarkable was the ability for users to send PDF documents to their Kindle for the cost of an SMS; that’s all of $0.10 irrespective of the size of the document.

(Web)-browsing for books within the Amazon bookstore was also costless and this encouraged users to shop in comfort and at their convenience. From a usability perspective, Kindles were pre-configured with a user’s credit card details so that the purchase and check-out experience was frictionless.

Taken as a whole, these examples really differentiated a user’s physical book experience. Amazon recast the overall process in a digital context while masking the complexities of mobile data and services built around a connected-device.

It would be wrong, however, to assess the Kindle phenomenon in isolation from Amazon’s wider strategy. Like Google and its focus on search to facilitate advertising, Amazon was motivated by its own strategy to exploit eCommerce scale economies. This began with eCommerce partners (increase in the numbers of sellers on its platform) and then progressed on to exposure of its platforms to developers (to encourage innovative uses of its platform technologies). This platform strategy effectively lowered the barriers to entry for small-users by converting CapEx-related decisions into OpEx-like pay-per-use services.


In this context, Lab126 was an adventurous strategy for corporate venturing in a new market category; it was a peripheral development that nonetheless imparted momentum to Amazon’s core business. At the same time, the Kindle was an elegant platform for targeting digital commerce, beginning with the physical book, and a new addressable market.

In a similar manner to Amazon, Google has set itself a goal of enhancing the in-home user experience. Its foundation builds on NEST’s connected device products and also its relationships with energy providers. These providers are able to use household energy consumption insights to optimise their energy supply obligations.

In the case of consumer users, NEST's service road map may lead to more of an ‘Apps-centric’ service strategy to encourage consumers to modify their behaviors. This would offer NEST a means of monetizing the resulting change in consumption patterns. To the extent that this leads to a shift in household spending, Google/NEST will be well placed to capitalise on this by expanding its intermediary role in the value chain between consumers, connected-home device suppliers and various utility service providers.

Google will certainly look for ways to leverage the NEST/energy provider activity to inject additional impetus to its core business. There is a risk that Google's traditional model of exploiting user data to serve advertisements may be compromised in light of the concerns that have been raised about the sharing of NEST user data with other Google business units.

Since NEST household are likely to represent a certain socio-economic and geographic demographic, however, one possibility is to create new services around an "opted-in" user community. These users might be prepared to share their data in exchange for profiting directly from the use of that data. This raises interesting questions about how payment would be effected and whether there is merit in a system of virtual currency rewards that is conceptually similar to Amazon Coins.

The connected home market has been gathering moment over the past few years with no major breakthrough in consumer adoption. Google's acquisition of NEST could be viewed as a way to add critical mass to the credibility linked to the connected home market. With the market now primed for action, there will also pressure on NEST to show a return on Google’s investment if it is not to avoid the same fate as befell Motorola and the popularization of Android.

For companies in the connected-home market, Google’s initiative raises the competitive stakes. Consumer expectations are being raised and this will develop into a threat for companies that have traditionally focused on ‘device-only’ strategies. Consider the challenges that will face home-security companies, for example, if NEST’s product portfolio extends to this segment of the connected home.

Telecoms service providers (cable-, fixed- and mobile) also need to assess their long term plans. Over the past year, for example, it appears that mobile operators from different parts of the world have expressed an interest in licensing AT&T’s Digital Life platform for connected home services. Could such a platform compete effectively with the type of connected home experience Google and NEST has set their sights on?

Or, is there an opportunity for several interested operators to step beyond their individual commitments in order to launch their own Lab126-like corporate venture?

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