Google buys smoke alarm maker for $3.2B, gets to rope in design guru who led the iPod team

Google Inc took its biggest step to go deeper into consumers' homes, announcing a $3.2 billion deal to buy smart thermostat and smoke alarm-maker Nest Labs Inc, scooping up a promising line of products and a prized design team led by the "godfather" of the iPod.

Nest will continue to operate as its own distinct brand after the all-cash deal closes, Google said on Monday.

The deal is the second largest in Google's history after the $12.5 billion acquisition of mobile phone maker Motorola in 2012.

Like the Motorola deal, which marked Google's first major foray into hardware, the Nest acquisition gives Google a stepping stone into an important new market at a time when consumer appliances and Internet services are increasingly merging.

"Nest Labs appears to be focused on thermostats and smoke alarms, but it's not far-fetched to see Google expanding this technology into other devices over time," said Shyam Patil, an analyst at Wedbush.

"Home automation is one of the bigger opportunities when you talk about the Internet of everything and connecting everything. This acquisition furthers their strategy around that," he said.

Shares of Google were up 0.5 per cent at $1,128.49 in extended trading on Monday.

Nest gained a large following with its first thermostat - a round, brushed-metal device with a convex glass screen that displays temperature and changes hue to match the color of the wall it attaches to. It also tracks usage and employs that data to automatically set heating and cooling temperatures.

With the acquisition, Google gets Tony Fadell, a well-connected and well-respected Silicon Valley entrepreneur credited with creating Apple Inc's  iconic iPod music player, along with co-founder Matt Rogers and a host of talented engineers and designers.

According to a search on professional network LinkedIn, roughly 100 of Nest's 300 employees have worked at Apple in the past.

Google, the world's largest online search engine, is increasingly expanding into new markets, with efforts ranging from a high-speed Internet access business to advanced research on self-driving cars and robotics.

But while Google's engineering expertise has generated major advances in technology, the company has at times struggled to create hardware products that resonate with consumers as much as Apple's products do.

The consumer experience of Nest's products "is Apple-like and it gives Google that," said Pat Moorhead, an analyst at Moor Insights and Strategy.

"What Google wants to do is be the backbone for your home, how you consume energy, how you consume content like music through your entire house," said Moorhead.

Some commenters on Twitter expressed concerns about the privacy implications of the deal for Google, which collects scads of personal data about its users' online habits.

"Not content with your personal data, Google now wants your home data by buying Nest," read a Tweet by Irene Ng.

"So basically Google will know when homeowner is away, when they've had a fire & what the power bill is?" Tweeted Brian Makas, who appended the hashtag #creepy to his comment.

In an interview with Reuters, Nest's Fadell said the company spent a lot of time discussing privacy issues with Google during talks that led to the deal.

"The reality of the situation is inside of Google they take privacy so incredibly seriously you have no idea," Fadell said, noting that Nest's terms of service would not change after the deal.

Google said the deal is expected to close in the next few months pending regulatory approval.

Early bets

Google has tried to gain a foothold in the smart home market before, launching the PowerMeter service in 2009. The service let consumers use the Web to monitor their home electricity consumption, but Google shut it down in 2011, noting that it hadn't caught on as much as Google hoped.

It was that same year that Nest's Fadell met with Google co-founder Sergey Brin at a TED conference, showing him a prototype of the thermostat. Google's venture capital arm, Google Ventures, made an investment in Nest not long after that.

Kleiner Perkins Caufield & Byers, the venture-capital firm that started backing Nest in 2010, made a return of 20 times on the $20 million it has put in over the years, for a return of around $400 million, a person familiar with the situation said. Shasta Ventures, which invested at the same time as Kleiner, stands to make a similar rate of return on its investment, a person familiar with the matter said.

Fadell said the deal with Google was the culmination of "countless" discussions that began in the summer of 2013.

"It took us months to get comfortable that they are going to bring to the table the things we need for scale and to realize our decade-long vision and that they really truly respected what we did," he said.

While Fadell's expertise in mobile products could be a boon to Google and its money-losing Motorola smartphone division, he stressed that his focus was on home automation products.

"That was one thing I was very clear about. I said 'Larry, I have already built all kind of mobile products, I have done all those things. I am not here to build those,'" Fadell said, referring to Google CEO Larry Page.

"I am here to build out this vision. Not to go and build the other things I have already built in the past," said Fadell.

Google's forays beyond the search box

Google Inc announced plans to acquire smart thermostat maker Nest Labs Inc for $3.2 billion, signaling the Internet company's intention to expand into a broader array of devices and bringing valuable hardware design expertise in-house.

The Internet giant has in recent years ventured further afield from its roots in online search and advertising, and is now a heavy hitter in industries such as mobile electronics and video-streaming.

The following are some of the newer businesses Google has ventured into or dabbled in past years.

Mobile software

Google's Android operating system, which evolved from a company-led initiative known as the Open Handset Alliance, is now the world's most popular smartphone software and is increasingly adopted for tablets as well.

Developed in-house by software engineer Andy Rubin, the software was designed to present an alternative to then-dominant systems such as Apple Inc's iOS and the Blackberry, and spearhead Google's drive into a then nascent field of mobile advertising.

Android allowed Samsung Electronics to leapfrog Apple in global market share, enabled new entrants such as Amazon.com Inc, and helped erode Blackberry's market position. It is now installed on an estimated three-quarters of the world's smartphones.

In 2012, Google also raised eyebrows by paying over $12 billion for Motorola Mobility - still its largest single acquisition - gaining an instant presence in the booming smartphone and tablet business.

Efforts to catapult Motorola back into the top ranks of mobile phone makers are continuing, but the Apple-Samsung stranglehold has been hard to break. The much-hyped, customizable "Moto X" launched last year has so far failed to win it significant market share.

Robots

In December, news emerged that Google had acquired Boston Dynamics, a privately held company best known for building futuristic robots, often co-developed or funded by the U.S. military. The purchase was the latest in a string of acquisitions by Google's secretive robotics division, now led by Rubin. The company has been tight-lipped about its plans in this field, though many media reports linked it to efforts to develop factory robots.

Glass and wearable computing

Google Glass, the "smart" eyeglasses developed by the company's famously secretive "X" labs, went on sale last year to select developers. The device, which projects a small screen in the corner of a wearer's eye, is expected to become a major catalyst for what many believe to be the next big trend in mobile, wearable computing devices.

Developers are now crafting apps to try and position themselves if the device, which can be voice- or motion-activated, proves popular with consumers. The company has not set a time frame for an eventual consumer launch.

Self-driving cars

Another brainchild of the "X" labs, Google began road-testing self-driven cars on Californian highways about two years ago.

Co-founders Sergey Brin and Larry Page conceived of the futuristic concept, driven in part by a desire to try and eliminate human error and consequently reduce the incidence of accidents on the road, while improving the efficiency of roadways and travel in general.

The concept spurred attention-grabbing headlines two years ago and automakers from General Motors Co to Toyota Motor Corp have since publicized their own intentions to research and develop an automatically propelled vehicle.

High-speed Internet service

Spurred by a desire to wield greater control of the Internet ecosystem, beyond just dominating search and advertising, the company has begun offering ultra-fast Internet service in several cities and free WiFi for chains like Starbucks.

Google says it is following through on a vision of universal Internet access, in hopes of improving living standards. To that end, it is experimenting with a system of using hot-air balloons to provide satellite Internet access in inhospitable or inaccessible regions of the world, including Africa.

Nest and the consumer business

The $3.2 billion acquisition of the 300-employee company started by Tony Faddell, the so-called godfather of the iPod, is expected to propel Google as a consumer brand deeper into the home. The company also acquires a team widely respected for its design and software engineering talent, potentially of benefit to Google's other forays into the consumer business, which run the gamut from YouTube to gmail and social network Google+.

Retail and commerce

The company offers an electronic payments and stored-value system called Google Wallet, which hasn't yet gained much traction with either retailers or consumers. It is also trying out same-day goods delivery in several cities, taking a page from the broader retail industry, which is now hoping it will galvanize sales.