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IPod Creator Fadell Sells Nest Helping Google in Rivalry

By Brian Womack and Adam Satariano
January 14, 2014 12:01 AM EST 30 Comments
Tony Fadell, chief executive officer of Nest Labs Inc., in London, on Nov. 27, 2012.
Photographer: Simon Dawson/Bloomberg
Tony Fadell, chief executive officer of Nest Labs Inc., in London, on Nov. 27, 2012.

Google Inc., after struggling to catch Apple Inc. in consumer gadgets, is turning to one of its rival’s top former executives to help narrow the gap.

Google said yesterday that it’s buying Nest Labs Inc., the digital thermostat maker led by Tony Fadell, a former Apple senior vice president, for $3.2 billion in cash. Fadell, 44, worked closely with Apple co-founder Steve Jobs in helping create the iPod and iPhone.

While Google dominates Web search and has grabbed the lead in smartphone software with its Android operating system, it’s a latecomer to hardware, which requires different skills related to design and manufacturing. The Nest purchase brings new devices and talent to Google, following the $12.4 billion acquisition of Motorola Mobility in 2012 and the company’s jump into connected products like Google Glass eyewear.

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“Google has done extraordinarily well with the technology behind a lot of different things, including Android and search,” said Ben Schachter, an analyst with Macquarie Securities, who has the equivalent of a buy rating on the stock. “But their design has historically been relatively weak.”

The purchase is the third largest for Google, trailing only smartphone maker Motorola Mobility and display-ad company DoubleClick, which cost slightly more at $3.24 billion in 2008. As of the end of September, Google had $58.4 billion in cash and equivalents on its balance sheet.

The Nest deal ratchets up competition with Apple in the connected-device market, where Web-based software meets hardware. It also deepens Google’s role in the so-called Internet of Things market, an industry of wireless, connected gadgets that could create between $2.7 trillion and $6.2 trillion of economic value annually by 2025, according to McKinsey Global Institute.

Challenged History

Google’s hardware results to date have been spotty. Sales at its Motorola unit dropped 34 percent in the third quarter to $1.18 billion from a year earlier, and Google’s Nexus tablet has failed to gain traction against Apple’s iPad. In 2009, a lead visual designer, Douglas Bowman, left Google for Twitter Inc., citing a devotion to data at the search company that sometimes stymied innovation.

Nest represents “a further push into consumer hardware,” said Carolina Milanesi, a director at market research firm Kantar Worldpanel.

Fadell started Palo Alto, California-based Nest after leaving Apple, where until 2008 he was a longtime deputy to Jobs and central to the development of the iPod and iPhone. Matt Rogers, who co-founded Nest, also came from Apple and was part of the original iPhone team. According to LinkedIn, 97 former Apple employees now work at Nest. The company has more than 300 employees.

Personality Clash

While at Apple, Fadell developed a reputation for his forceful personality and occasionally clashed with other executives, including former mobile software head Scott Forstall during the iPhone’s development, Bloomberg Businessweek reported in 2011. From 2006 to 2008, Fadell had a net profit of $61.2 million from the exercise of options and sale of Apple shares, according to Equilar Inc.

“This is not my first rodeo,” Fadell said yesterday in an interview. “I understand what scale means. I’ve used scale to my advantage in other places to really change the world.”

After a brief period away from the industry, Fadell began working with a few engineers to build the Nest thermostat. The product was eventually unveiled in late 2011.

Fadell said in a blog post yesterday that conversations with Google started in 2011, when he showed co-founder Sergey Brin an early model of the prototype. That year, Google’s venture arm invested in Nest, following earlier financing from Kleiner Perkins Caufield & Byers and Shasta Ventures.

Takeover Chatter

Talks took a more urgent turn late last year as Nest considered whether to raise more money from outside investors or be acquired by Google, said people with knowledge of the deal, who asked not to be identified because discussions were private.

Fadell said that Nest executives previously reached out to Google about working more closely together from a technology perspective. That evolved into acquisition talks involving Google Chief Executive Officer Larry Page, Fadell said. Eventually, Fadell was convinced it was the right move and said that Google could help the company with hiring, promotion and distribution.

“This wasn’t like over a weekend and here’s a number,” he said. “We felt very good that this was a hand in glove kind of marriage.”

Lazard advised Google on the deal.

The Apple-Nest ties can occasionally be seen at BJ’s Restaurant & Brewhouse next to Apple’s headquarters in Cupertino, California, where Nest employees socialize and try to recruit their former colleagues, according to a one-time engineer at both companies, who asked not to be identified because the meetings are private.

Apple’s Fingerprints

Nest’s “learning thermostat” takes cues from Apple by combining a slick, polished hardware design with software that learns consumers’ heating and cooling patterns over time and makes automatic temperature adjustments based on that history.

The devices can be controlled and tracked via smartphones and tablets. The thermostat costs $249 and the smoke detector is priced at $129.

“They’re already delivering amazing products you can buy right now,” Page wrote yesterday in a statement. “We are excited to bring great experiences to more homes in more countries and fulfill their dreams.”

To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

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