Season 2, Episode 3: Nest

Transcript from https://podmenti.com/t/3bd1c1559529aa6e

It the color really does have an impact on your brain. Yeah. Yeah, it's like with these billions of dollars, the technology companies actually hire psychologists to intentionally do this stuff.
Welcome to Season 2, Episode 3 of Acquired, the podcast about technology, acquisitions and IPOs.
I'm Ben Gilbert.
I'm David Rosenthal.
And we are your hosts.
It's finally time to cover a no-brainer story here on Acquired, Google's 2014 acquisition of Nest.
David, are you pumped?
I am
So pumped.
We uh
Um there's no shortage of research for this one. There's no shortage of requests for this one.
And actually that's pretty timely with uh uh the announcement coming out last week that Google is rolling Nest back into, or I guess for the first time into its its main hardware business instead of running as an independent subsidiary.
Yeah, I mean the question is like which nest acquisition or divestiture is this officially
gonna be about.
rolling out into a standalone unit of alphabet.
And now the reacquisition back into Google.
Yeah, well, and not to mention a half a billion dollar pickup of drop cam along the way.
Not along the way. Uh we just might cover that.
It's true. It's true. I so
to make sure we're on the same page for the full episode, uh this is the original acquisition of of Nest. Um
where they Google actually wired cash to the bank accounts of people who own shared in Nest.
That's so prosaic, then.
A couple of announcements l uh for listeners before we dive in. Uh David and I have been playing around with a lot of new podcast apps recently, and one of them that's pretty cool is Breaker. So if you're using the Breaker app and listening to us right now, um, or if you want to uh try it out, please comment on this episode. We're we're experimenting with
um how the rise of social podcast apps sort of affects discoverability and would love uh love your um your comment on on this episode to to see how it compares to the effect of people leaving reviews on iTunes accounts. So maybe if we uh mobilize the acquired base, um we can uh we can help discoverability the show.

Um if you are new to the show.
Uh you can check out our Slack at acquire.fm, uh over eleven hundred strong.
All right listeners.
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And just tell'em that Ben and David sent you.
So David, I think we've got one piece of follow up before diving in.
Yeah. Um
So we wanted to do a follow up on the Apple Beats episode, um, which actually kinda hard to believe was the last episode just you and me that we did together. Uh had so many guests and specials since then, uh, which have been great. Um but in the interim, uh listener uh Devin wrote into us about something that we
didn't talk about in the Apple Beats story, and that's that Dr. Dre has a history of assault, uh, back in his earlier days with NWA. Um, and in particular assault and violence towards women.
Which is obviously a pretty important thing and we should have mentioned it as part of the episode.
So now in this case it's
somewhat of a complicated situation, uh and we aren't really equipped on acquired to prosecute the specifics of this or any other case, uh really.
But the documentary that we mentioned, the Defiant Ones, addresses it pretty well, um and pretty fully so definitely you should go watch the movie for lots of reasons. Um, but this is an important one. But but that said, we do think it's important for us to acknowledge it and we want to make sure we put it out there on on this show. Um so thank you, Devin, for calling it out. Yeah, but
I think uh David, to just underscore your point, uh this just hit us like a ton of bricks when we got this email because we you know, we didn't mention it once on the episode and it it it shouldn't go overlooked. And um
You know, we do a lot of founder glorifying on the show and I think
it's really important to, you know, look at the whole person.
Yeah. It's it's a good reminder that just like you said, Ben, it's easy to treat
you know, founders and Silicon Valley folks as heroes. Um we often do on this show, but uh, you know, they're people
Like any other people and
Some have good sides, some have bad sides. Um it's just important to remember that. So we'll try and keep that in mind with everyone going forward. Uh thanks again, Devin, for pointing it out.
Uh and with that
Let's move on to Googling Nest.
Um
Okay.
So you definitely can't s talk about Nest without talking about the well known, uh, and at times
controversial, though not as controversial as Dr. J, uh co-founder, um, you know, whose name is basically synonymous with the company.
Of course, uh I'm talking about
Matt Rogers.
Classic. Matt Rogers just always all over the news. Always all over the news. Matt Rogers is the um is the co-founder and uh uh I believe chief product officer of uh of Nest, and we're gonna talk
A lot about Matt. Um
But no, the person I'm referring to is the
quote unquote father of the iPod, Tony Fidel.
Uh, which which I presume most folks listening to the show uh have heard something about in the past
Uh but who is
Tony.
Um
Well
So Tony grew up in the seventies and early eighties.
uh primarily in Detroit, although his father was a salesperson for Levi Strauss, the jeans company, uh based here in San Francisco. Um so they moved around quite a lot.
Um but Tony, turns out, was really influenced by his maternal grandfather. So his mom's dad, um, who also lived in the Detroit area.
And uh he was like uh
This
Sounds like awesome kind of depression era like
You know, self reliant like
Tinkerer sort of
Uh he was not an engineer, he was a school teacher and a school superintendent, but sort of proto um engineer, and he really encouraged Tony when he was growing up to like fix stuff around the house and do everything yourself and take things apart and understand how they worked. Um
And uh and so this had like a big impact on Tony.
Um and then when he was uh around the age of twelve
Yeah.
Uh and took that same approach to computers. So we got an Apple II, we took it apart, he put it back together, um, was totally obsessed with it. David, can I just pause for a minute? Like
I have some of the stuff that you find, like it's like you grew up with Tony somehow. It's like, Oh yeah, like he was down the street from me and it's it's just impressive. Well, there's uh we do a lot of research on this show, um and uh a lot of this comes from um
Tony uh was part of um
I forget exactly what this organization is called. It's like the Achievement Organization or Achievers or something like that. And you received a
a word um from them and did a big oral history on kinda his uh his background.
Um, so we'll we'll see if we can uh link to that in the show notes. Um, but there's a lot of good stuff out there about all this history. Um
And uh so he's hooked on he buys the Apple two.
He's hooked on computers. Uh he ends up going to college at the University of Michigan. Uh this is in the uh in the late eighties, uh mid to late eighties, and he studies computer engineering, which is a combination of computer science and electrical engineering. Um so he's getting both hardware and software um in school.
And then he also gets an education in entrepreneurship uh at school. He starts um actually not not one, but three different companies uh while he's at the University of Michigan. Um the largest uh most successful of which was uh education software company.
that he started with one of his professors, um it was called uh I think constructive instruments. Um
So he's he's kinda he's got the he's got the hardware, he's got the software, he's got the entrepreneurship. Uh he's a total Mac nerd and nut. Um
And apparently he he also he's a subscriber to Macworld.
And he's re reads the magazine religiously and he hears about this right as he's
Senior getting ready to graduate. He hears about this stealth startup in Silicon Valley um that was a spin out from Apple started by a bunch of legends from the initial Mac team uh called General Magic, and Tony decides I need to go
Get a job at General Magic and move out to Silicon Valley.
So David, before the show we were texting and you like alerted me to the existence of general magic. And I have like a a shame bag over my head of of like calling myself an apple nerd and and having like
You know, having cared about the company for a long time, like I I did not know about
this company and it's insane. Like
Yeah.
Tell us about some of the history of of General Magic.
Totally insane. So
This company was started uh in the early nineties in the Valley. Um, and it was like all the legends from the initial Mac the original Mac team at Apple. Um, so it was Bill Atkinson.
Uh Andy Hertzfeld.
uh Mark Porat and Joanna Hoffman.
Um
Many, if not all of those, I think are kind of central characters in the Steve Jobs movie, um, which is another good movie you should all go see if you haven't. Um
And uh and they were like uh all super well known in the Mac community. Um, and they left Apple to start this company and it was it was totally secret what they were doing. So Tony
And and nobody else had any idea what they were actually doing. It was just that it was this dream team out in the valley.
Um, so he uh he graduates, he goes out there, and he basically like talks himself into a job uh with General Magic. I think he was like the thirtieth employee or something like that. Um and it turns out that what they're doing is uh they're basically they have a vision to
Essentially build the iPhone.
Uh, but it's like the early nineties, so it's like way too early for the iPhone. Um and the company actually turns out it would
You know.
consume a whole bunch of capital, it would go public, it would fail, it would pivot a bunch of times.
One of the things that comes out of it ends up being OnStar. The like, you know, if you've ever driven a Chevy or a GM vehicle, the like
Connected.
Roadside assistant thing. Um but the vision was to build a connected an internet connected uh PDA, personal digital assistant that people could keep with them, you know
all throughout their day and their lives, uh would be connected to the internet, could do email, uh, could do phone calls.
Um and amazingly, like some of the other people who worked at at General Magic along the way, Andy Rubin, who started Danger and Android, Pierre A Midiar, the or Midier.
I never know he had a A MidyR, I think. Yeah. A MidyR, uh founder of eBay. Kevin Lynch, who was the CTO of Adobe and now runs Apple Watch at Apple.
Um like there's this just ridiculous mafia of people that worked at at uh General Magic and and each sort of
Even though the company failed, like
took little pieces of its vision and made them reality at different pieces of the ecosystem.
Yeah, yeah. It's it's uh
Awesome. We we we didn't know when we started digging into the history for this that this was gonna be as much an Apple episode as a as a Google episode, but um with Tony Fidelity you just can't uh you can't stay away from it. You can't stay away from it.
Um
So
Tony works there for three years in his first job.
Um
And and it kind of becomes clear that like the market is not ready. The technologies are not ready for, you know, essentially the iPhone. Yep. Um, so he leaves. Uh, but he's not done. He goes to Phillips, the big uh the big Dutch electronics uh manufacturer. Uh he becomes the youngest senior management member there.
Um and he essentially tries to do what General Magic was trying to do, build a connected PDA. Um
inside Phillips. Uh and he spends four years there trying to make it happen. Uh also
fails. Um and he he kinda develops a reputation as uh it's unclear like how much of this was is is just who Tony is and how much is uh he was intentionally trying to cultivate this persona, but he's like the brash, like young like Silicon Valley hotshot in this big static company. He um
He gets a reputation for like yelling and screaming during meetings and all sorts of stuff. Um at one point, I guess Fast Company does a uh does a profile on him, uh and and they ask him, you know, what what would you be doing if you weren't in tech? And he says I'd probably be in jail.
Which is probably not true, but you know.
There we are. That was the reputation he was he was cultivating. Um
So it's not working, this whole connected PDA thing isn't working within Phillips either. Uh a couple of years later
Nineteen ninety nine.
uh Napsters around the internet's really taking off, uh music and MP3s are a thing and Tony's like
MP3s like this is the future. I want to get involved in this.
I need to go uh get in this industry.
And so he takes it.
Isn't there some crazy story about like Toshiba made these tiny hard drives, but they didn't exactly know what to do with them? And somehow Tony's like, Oh, I know what to do with them. Well, that was not Tony, but that was John Rubinstein. Uh uh We'll get to that in a sec. But so Tony's like, I want to get into music.
You know, he could go to Apple, he could do all these things.
He's like, I'm gonna go to Real Networks, which is the company in Seattle. Yeah, baby. Right in our back in our backyard. Which speaking of speaking of mafias, the the like mafia of people that came out of real is is pretty insane, too. Like particularly in the Seattle tech ecosystem, you look around at
Um, particularly at all the major, um, like successful consumer companies and the the real networks mafia is
Is
is probably sort of the most dominant source of talent in the region over the last twenty years.
Yeah, that and um
The Aquanov uh Mafia, of course, too. Yeah um
But anyway, so Tony takes a job at Reel. He lasts all of six weeks. Remember, he's like the controversial executive here. Uh he stays at Reel for six weeks.
Something happens.
And uh he decides, you know what, I'm still gonna pursue this MP three thing, but I'm gonna do my own startup and do it on my own. So he leaves.
Uh he starts a company called Fuse Systems. Um and his
approach to MP3s is he wants to build hardware to play MP3s, but he's not yet thinking about, you know, portable iPod style hardware. He wants to make like audiophile quality
rack mounted, like stereo hardware, like something you would keep next to your, you know.
Uh receiver in your home hi five system. Next to your home pod.
Yeah, next year homepad. Exactly. He's just he's he's habitually like twenty years ahead of the ahead of the world. Um
So he does that. Uh he starts the company, like I said, in nineteen ninety nine.
Um
Things go along, you raise some money.
Uh, but then the dot com crash happens.
Um and uh and it's two thousand, two thousand one
the company, even with Tony's, you know, reputation, uh, is not able to raise money. He's running out of cash. He's trying to figure out what to do. Um and so one weekend apparently
Uh he's uh he's skiing. He also loves skiing. This is gonna become a a recurring theme here. He's skiing in Tahoe and he gets a call on his cell phone.
Uh and he picks it up.
And it is John Rubinstein from Apple, who is the S V P of hardware at at Apple.
And uh and John had been was a veteran of Next. Uh so he had joined Next when Steve Jobs was at Next, um, then came with Steve back into Apple, um and was running hardware at the time.
And so John and Steve have been thinking about the music space for a long time. They just this is now the like spring of two thousand one. They just launched I t the iTunes software. The store wasn't out yet. Um, and they're looking for
Um
potential to build a hardware player to go along with it.
Um and
They couldn't quite find the technology to do it. And then apparently the story is that
John and Steve are separately on business trips to Japan.
And John's meeting with Toshiba and they show him this one in one point eight inch hard drive that they have, and they're like, We don't really know what to do with it, like you were saying. And John's like, I know what to do with this. So apparently Steve was also in Japan at the time. John
Calls him up and he's like, We gotta get together. They get together for dinner at a hotel and he's like, I've got it. We can do it. A thousand songs in your pocket. Toshiba has the hard drives, we can make it happen. And so Steve's like, All right, go ahead.
And uh John
finds out about what Tony had been working on, calls him up. He's like, Tony, you're the guy. You gotta come in here.
w we need your help. Uh can you come do a consulting project for us? And Tony's like
Okay, you know, I need some money'cause I'm running out of cash in my startup.
He comes in, he does starts the consulting project, and he quickly figures out that like this is
like the most important thing in Apple going on here. Um so he spends six weeks. He puts together a whole plan for
what components Apple needs to build this hardware, all the software coming together.
Um
And uh and he actually builds a styrofoam model of uh of what the iPod could look like. That's amazing. That's super similar to the um the story of the original palm.
Um the founder of Palm ended up c uh carving out of a block of wood and then for like weeks bringing around this block of wood to meetings and pulling it out of his pocket to like pretend to take notes on the block of wood to see like does the form factor work for me? Yeah. Uh it's uh you know, product design. It starts with tinkering. That's right. Um
So uh so the end of the project he they he presents to the whole senior leadership team at Apple and they're like, Okay
Great.
We want you we want to hire you to come.
Do this. And Tony's like, Well
But I've got this startup and I've got all these employees. And uh Which let's be clear, like h how how is he doing a consulting gig
while running a startup like for anybody running a startup, like imagine going and taking on a
you know, incredibly important product even for like a month and a half at a company like Apple. How does that work? Yeah.
This is where the research gets a little uh unclear. This is the problem with uh you know when you're listening to Tony tell
The story only from his side. I couldn't find anything out there of how the employees of Fuse felt about this. It feels like there may be like a very strong COO presence or something at at Fuse.
Yeah.
Well, who knows? So
Anyway.
Apple and Steve and John, uh Rubenstein are like
Great.
We wanna hire you.
We don't want to acquire fuse. We want to hire you. Um
And uh and after a bunch of thinking about it, uh Tony says, Okay, fine. Uh so he's
shuts down Fuse and he goes to work uh in the spring of two thousand one for Apple.
Um and
Basically like
This becomes the focus of like the entire company for the next couple of months because they want to get the product shipped for the holiday season.
Um and they do. It's kinda it's pretty amazing from like it's it's like ten months from when
Rubenstein sees the one point eight inch hard drives at Toshiba uh in Japan.
uh till they they ship the iPod in October of two thousand one. That's mind blowing. Like think about the number of Kickstarters that like take three years and then don't ship a product. I mean that to be able to do that in ten months.
Totally mind blowing. And I and I promise this is all leading to Nest eventually. Um so Tony stays on at Apple after they ship the first iPod. He ends up working on the next eighteen versions of the iPod.
Um, and in two thousand six, uh, John Rubenstein retires and Tony replaces him as as S V P of the iPod division. So he's reporting directly to Steve, one of the senior managers, most senior managers within Apple.

And so just before that happened.
I promised that Matt Rogers would come into the story eventually. The famous, famous The famous, famous Matt Rogers. Um he uh uh the iPod team hires an intern from Carnegie Mellon, uh who shows up in I think this was two thousand five, uh and it's Matt and he shows up
And uh and he gets they sit him I don't I don't know if he was the first intern or one of the only interns on the iPod team. Uh they sit him next to the printer cube and like they basically make him do like all of the grunt work for uh for the iPod team.
Um and Matt like loves it. There's uh he does a great um he does a great uh um
uh entrepreneurial thought leaders talk uh with uh at Stanford um a couple of years after he started Nest and talks about this and how like
He was just so happy to be working at Apple, so happy to be working on the iPod team.
Yeah, he was like fetching printer paper. He was traveling around the world handling logistics for like installing firmware on the iPod Shuffle and all this stuff. Um so he makes a big impression on on Tony. And apparently at the end of the summer, uh Tony gives him a a cash bonus uh for his work during the summer, which like
the the Apple and the iPod team had never done before. Matt was the only person to to have this happen. Um
So he graduates, he comes back uh to work uh for Apple and for the iPod team, right as Tony is getting promoted to being the head of the whole thing.
Um
And this was in two thousand six.
And at the same time.
This is when the iPhone is starting to get worked on, uh, within Apple. And this is so cool, reaching back to
Other of our episodes here.
Um and it was fun to read about this. There
as as is now kind of widely known, there were two competing
uh projects to become the iPhone. Purple one and purple two.
Yeah, and so I think
I think the iPod I think Tony's was purple one.
Um
And it was the the plan was they were gonna take the iPod software.
Um and hardware and
push that towards a phone. And so Tony, Matt, everybody's working on that.
And then competing within the company, Steve also had
Scott Forstall.
Take
OS ten try and shrink that down to fit it onto something the size of a phone. And uh and famously, you know, the the direction that Tony goes is the like using the iconic
click wheel for the iPod, and that's the primary interface to the phone, and Scott goes with
The touch interface.
Um
And uh
And and this is all now talked about when the tenth anniversary of the iPhone happened uh last year. Uh, both Tony and Scott, you know, did a bunch of interviews and talked about this and
Uh apparently it was like pretty bitter rivalry within the company between these two teams. I bet.
It's interesting too thinking about like
You know, now now when we reflect on like Apple's revolutionary interface, it's it's multi-touch. Like that they they invented this
uh incredible capacitouch thing that is like the dominant way that people interact with technology now. But they had already done that once before. Like Tony and team with the iPod the the the click wheel was completely revolutionary. And like completely revolutionary.
Uh you know, compared to like the Rio players and the the Walkman that came before it, like
It was a completely different experience. And and you know, companies
Companies rarely have like that that dominant of an innovation twice.
Or or and you could argue multiple more times after that too.
Yeah. Um
It's uh it's pretty amazing. And and it all comes from
Different people within Apple.
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So
Obviously Scott Forestle's team with the multi touch wins the battle, the battle of the codename
purple iPhone, the future of the iPhone.
Um and and this is this was
Just shocking when I saw it. We're gonna link to this in the show notes. So if you watch the demo in January twenty th to January two thousand seven, when Steve Jobs announces the iPhone, like probably the most famous Steve Jobs moment in history.
Uh
The
When he's walking through how the phone app works and he's going through the favorites,
He um
Uh he's he's showing how you can add favorites, the favorites tab, and it's all visual and this is all new.
And then he talks about like when you know it's easy to remove somebody.
And
He removes a contact from his favourites. The contact he removes
Is Tony Fidel. No way.
Cold blooded. It's it's brutal. Uh and of course nobody nobody knew, but apparently, you know, there are a bunch of interviews now afterwards now that this has all come out that like all the engineers, at least on the iPod team, like knew that that like they knew exactly what that meant.
And uh
So
As as you know, foreshadowed by Steve in the demo, uh, within the next couple of months, Tony is gone from Apple. Um
And uh
And so he's
It's it's now late two thousand seven, two thousand eight.
He's left Apple, uh, his wife who he had met at Apple, uh, they they both leave and they're like, All right, we're we're done with this. Like this is this is too much. We're gonna spend some time with our kids. They have young kids.
They do two things.
One.
Uh as you mentioned, Tony had always loved skiing. He loves Tahoe uh they decide they're gonna build their dream vacation home in Tahoe.
Uh and they're gonna travel all around the world. Uh
Make up for all this time they'd spent, you know, at Apple working super hard for the last ten years. Um
So they start they start building
The Taho house.
Um and uh and then they're traveling around the world, they start spending a lot of time in Paris, they end up buying an apartment in Paris.
Um
But when they're working through the Tahoe house
Tony's like he he's kinda like going back to his grandfather and like as he talks about it and like, you know, tinkering, wanting to be involved with everything, he can't help himself. And he's like all these products, everything that's going into the house, it's all like
Total BS. Like these things suck. Like I can do so much better.
So he's
He's thinking about that. He also wants the house to be super green.
uh and energy efficient. He's finding it really hard to do that.
Um
And uh and he ends up one day, he uh when he's back in the valley and he's from from Paris and he's working on the on the Tahoe stuff. Um
He uh he gets lunch with his old intern with Matt.
And it turns out that Matt had also bought a house recently in the Valley and uh and the house was like from the seventies and had all this old, you know, seventies style equipment in there. And Matt's also trying to kinda retrofit it, having a super hard time, and Matt's like
You know, he's having lunch with his like boss's boss's boss, who he was the intern. He's like, We should start a company together. Which which is we gotta do this. That is the strangest feeling after you leave a company and someone was like a mythical person from on high that you only saw speak to a thousand people and you know, you may have had one or two interactions with, but like then then to just
Like
Yeah.
All the pretense is gone because you've both left the company and you have it's happening to me just a couple times and you're like, Oh my gosh, like
That
it it's weird to collapse all those levels of management and then just have like a human to human relationship with someone.
Yeah.
I mean, you're talking about a guy who was literally once in Steve's jobs favorites on his iPhone. Uh so so Tony's like, Yeah.
I don't know, I'm kinda enjoying this, you know, Paris thing, but
You know, maybe maybe like you work on it and you see see kinda what's there.
Um so Matt throws himself into this. He's still at Apple.
He starts doing a ton of market research. He gets totally excited. They're doing it too. They're talking to installers. They're going and they're looking at homes. They end up talking to somebody in the EPA who's done a lot of thinking about how thermostats can influence you know energy consumption. Matt was still at Apple during this?
And that was still a still at Apple Dare.
Um
And uh and so he's pumped. He's trying to get Tony excited.
Uh, and then supposedly, as the story goes, told by Tony, one day he's back in Paris. He's he's just dropped his kids off at school, I think. Uh, they're at a French preschool, and he's walking along a bridge by the Louvre, and he looks at the Louvre and he and he thinks about all the like great stuff and great creations in there. And he's like, You know what? I'm not done.
I wanna I wanna get back into it. And so he calls Matt up from a bridge over the side. What a setting right there. What a setting. And he's like, I'm in. We're doing it. Um so uh so Matt leaves Apple at this point, rents
of course a garage in Palo Alto and starts uh starts tinkering on on stuff.
Um
And uh and apparently in those early days, like nobody even knew that Tony was involved. They wanted to be super, super stealth. Um so it was just Matt.
Uh Tony moves back to the valley in June. Uh he and his wife move back. He becomes CEO.
And they decide that they're gonna name the company Nest,'cause it's you know, the goal is I don't think they've even landed ful doing thermostats yet. Uh, but they wanna reinvent the home.
And they're talking about uh what can we call the company? They're talking about um
The uh the the old MTV show Cribs and they start riffing on that and that's how they come up with Nest, apparently. You shouldn't have just called it Crib.
Yeah. I know they should have called Cribs.
Maybe maybe it would be, you know.
They w they would be doing better in Google, but Whoa data. Let's let's you know, we're not at that part yet.
We're not at that part yet. Uh so they recruit
A killer team from from Apple, folks they'd worked with. Um
uh they recruit some folks from General Magic, uh and then they make one really key hire.
uh they're they're able to land Matt's uh thesis advisor uh at uh from CMU is a woman Yoki Matsuoka.
Uh who is
pretty incredible person. So in the in the couple years since Matt was at CMU, she'd left academia uh to co-found Google X with Sebastian Thrune.
Um, she was a robotics uh expert um in uh uh at CMU and then and then actually at the University of Washington in Seattle. Um
And so she co founds Google X with Sebastian Thurn. Uh she also gets awarded the MacArthur Genius Grant for her work.
Um
And uh and she's been at Google X about a year, and Tony and Matt are able to recruit her away, uh, and she joins as VP of technology in the super early days at best. Um
And uh and then Sebastian, uh he's like
Of course, interested by this. So he ends up getting involved. He becomes an advisor to the company as well.
So there's a lot of things. While he's still running Google X.
While he's still running Google X, yeah.
Um
So September of that year, twenty ten.
Uh there is a nine and a half million dollar series A from Kleiner Perkins and Shasta.
Um, and then they get to work. At this point, they've decided that the thermostat is their entry point into the home. They want to build a
a whole, you know, generation of of both products, hardware products, uh to make the home more intelligent, but also the software layer and the operating system that's gonna
that's gonna bring it all together. Um so they raise they raise their series A. And then apparently in early twenty eleven. So they don't ship the product until they take a whole year, October twenty eleven they ship the product. In early twenty eleven though, Sergey Brin, uh the Google co founder
sees an early demo and an early version of the thermostat.
And apparently he's blown away. He thinks that like immediately this is gonna be
The next, you know, after after smartphones, the home is gonna be the next operating system. Uh, he wants to acquire the company right away. Um
And uh and the company said no. Uh so that was the first time Google tried to buy the company. Well, perhaps my grade at the end of this episode would have been higher if it was uh bought at that stage.
Yeah. Well.
We may be. We we'll have to save it for what would have happened otherwise.
It's worth like touching on, you know, now
this doesn't seem as revolutionary, like oh of course, the smart home, you know, it's it's it's in many news stories, there's many great companies, it's a lot of funding around this now. Clear ecosystem plays with Google Home and Alexa and all that.
This is ridiculous at the time. Like I remember seeing their landing page and it's like it's Apple esque and it's beautiful and it's got the thermostat on it and it's uh you know announcing like at some point we'll ship this thing and you can get information and updates here. And
just the the media cycle around this was just ripping it apart. Like this is the peak of Silicon Valley, you know, buying their own BS. Are you kidding me? Like this this is not innovation, like really thermostats, thermostats is the next frontier and
Uh it was just kinda pressure.
Yeah. Well and I feel like
There's a lesson here,'cause the same thing happened with Rover, uh, which which started right around the same time, uh, almost exactly at the same time. Yeah. And there are all these tech crunch articles like Airbnb for dogs. Like this is a sign of the apocalypse, Silicon Valley is over.
Um people thought A Aaron, the CEO of Rover, Erin East, people thought he was nuts for going and doing this. Yeah. I mean Aaron had a super successful career at
Uh, actually, you know, somewhat similar to Tony, although I think Aaron's personality and Tony's personality are polar opposites probably. But uh Aaron was the youngest GM at Microsoft ever. Uh he came from from Aquaniv when Microsoft acquired that. Um and that he would go work on, you know, Airbnb for dogs. That's crazy. Uh and yet both of these companies, you know
Turned out to be.
quite important. So Fidel Fidel from reinventing consumer electronics to g make becoming a thermostat maker.
Yeah.
Well, uh when if somebody makes fun of your startup, you should probably take that as a compliment. If people care enough to make fun of it, or at least fun of it startup. It's still likely to fail, but if people aren't making fun of it.
Yeah.
You know for sure it's not going to be huge.
Yeah.
Ha ha
Uh
So
The next year, October twenty eleven, as I mentioned, they launched
the product Nest Learning Thermostat. Um there's a ton of buzz, ton of hype.
Uh they raise a fifty five million dollar series B, which remember, this is back October twenty eleven. Like
We're we're not yet in the steroid era of, you know, like super rounds for startups. This is one of the early like a fifty five million dollar series B.
is a lot for a company that just launched a product. Um
But it's all on the back of this hype and and the quality of the team.
Um, you know, expensive hardware.
That's uh.
Um yeah.

Startups are making um
Yeah, I mean it just feels like it i it's a super capital intensive business to do that R and D in production.
Yeah.
Um, it definitely is.
Um
And so the lead of their series B
Is
You guessed it.
Google Ventures. One of the first big investments uh out of Google Ventures, which at that point was a relatively new uh operation within Google. And they would actually they they would end up owning at at the time of acquisition, foreshadowing a little bit, twelve percent of the company.
Before even buying it.
Yep.
Yep.
Um so that was at the end of twenty eleven.
2012, they launch the second generation of the thermostat, uh, which is compatible with a bunch more homes and wiring systems. Uh gets up to I
I believe with that version up to like eighty five, ninety percent of home uh home wiring systems are compatible with with the Nest, the second version of the Nest. Um
Then January twenty thirteen, they raised their series C, they raise eighty million dollars at a eight hundred million dollar pre-money valuation.
Um and they
it gets announced that they're shipping on the order of fifty thousand thermostats per month, um, which at a which at a price of two hundred and fifty dollars per thermostat puts them well over a hundred million dollar annual revenue run rate. Now
As you pointed out, Ben, this is hardware revenue with a bunch of
Costs and expenses uh associated with this isn't Facebook here.
This is this is not Facebook, but still, like that's pretty pretty impressive, you know. About fifteen months after launching the product, uh and
What is that, like, you know, less than three years after starting the company. Or just about three years from starting the company. No, less than three years, you know, at a hundred million dollar revenue run, right?
And I believe not profitable. I think they went all the way through the acquisition and and ye years after. Maybe even today it's not totally clear, but but not not profitable revenue.
Yeah, not not totally clear, but it seems unlikely, especially given how much money they were raising. Um presumably they were doing that for a reason. Um
And uh so then later in twenty thirteen they launched the second product, uh, which was
hotly anticipated. They'd always talked about, you know, the vision of being a fully connected home.
And it's funny, like the same thing happens. It's a smoke detector. Uh smoke detector and carbon monoxide detector.
And everybody's like, smoke detector. Come on. Uh this is what this is next next next product. Um
And we'll come back to the smoke detector uh later. But that was October twenty thirteen.
Uh
In January twenty fourteen, so a couple months later.
Um, it gets reported that Nest is now gonna be raising a monster round uh from DST from Yuri Milner's uh investment firm that invested in Facebook and many others. Uh they're gonna be raising over$200 million at a three billion dollar valuation.
Um
But instead.
On January thirteenth, it gets announced that Google is finally
acquiring the company for three point two billion in cash.
Um
But then as you pointed out, they already owned twelve percent of the company.
Yeah, and at this point still
Only two hundred and eighty employees.
I mean to be per purchased for that price, making hardware with supply chain and and you know
full uh um operations logistics, uh uh
you know, retail on their website, uh ch channel to retail partners, full R and D team. Only two hundred eighty employees
It's it's impressive. I mean it's eleven billion eleven million bucks per employee.
It is, it is. And you know, remember too, like um
You know, you mentioned channel, like
that means, you know, Best Buy. That means Lowe's. That means Home Depot. Right, right. That means um not just building the relationships with those with those uh retailers, but
You know, getting product in shelves, keeping them stocked, and all this stuff. It's not it's not easy doing this stuff.
Totally.
Um
Uh so
It's announced.
Uh
And the terms of the deal are are pretty interesting. So um
Nest is to remain wholly independent. So Google is still Google at this point. There's no alphabet yet. Um
But they announce it very clear this is gonna be like YouTube, gonna you know, Tony's gonna remain CEO, the management team, Matt and Yogun and everybody else are gonna stay independent, um, gonna have their own offices. Which which is very much a Tony demand. Like we're we're not getting bought by Google to
be integrated in me to have a boss. Like I get my own P and L, I get my own budget, you know, we're we have our own office.
And remember, of course, you know, Tony is a is the veteran of
First General Magic and then Phillips and then Apple, where he's seen all these corporate politics play out and
Um
You know, he's kinda he's had a lot of success, but he's also ultimately lost the game, uh, in every case. Um
And so supposedly there was a
a term in the d in the deal. Uh it's not public, no way to know, but it's been reported um that there was a term in the actual documents that uh Nest was given five years runway, uh end up completely independent of any financial goals. So essentially as much financial resources as they wanted
to with the goal of building like the OS layer hardware and software for the connected home.
um and no accountability for any sort of profitability or revenue growth, um, supposedly in the in the deal.
Um
And then is it later that they wanted them to hit three hundred million dollars a year of revenue?
Th there was some target set there at some point. Yes.
Yes. Okay. So that was January twenty fourteen.
That was basically the high water point for Nest. Or at least for Nest and Google's relationship. Uh And here's an interesting data point on that too. So from uh Google's ten Q that they um filed with the SEC uh a few months after this happened, they they talk about how they uh
came to value the deal. And so they say uh the fair market value of our previous h previously held equity interest was$152 million. So that's that that twelve percent
fifty one million bucks was cash that they acquired. So so from the last fundraising round or however they were generating cash at Nest. Um
four hundred and thirty million was attributed to intangible assets, and
A hundred and fifty seven million to net liabilities assumed.
And two point three five billion dollars attributed to goodwill that is primarily
for the synergies expected to arise after the acquisition.
So
You know, this is not a a multiple of current cash flows or anything like that. That this is a we believe there are serious, serious synergies with Google, and that's why we're doing this.
Yeah. And interesting. What did you say fifty one million dollars in cash uh at the company that they acquired? Yeah. Okay. So
And they had raised at that point about a hundred and
forty five hundred and fifty million dollars. So that means they'd burned roughly a hundred million dollars um on uh on the product. Now it's we don't know
what their cash flow was like at the moment in time they were acquired, but I think it's safe to assume they were not profitable and
Burning a lot of cash. Right.
Right.
Um
Even with the relatively small amount of p of employees, as as you mentioned. Um okay, so that was January twenty fourteen.
Now the bad news starts. Uh April twenty fourteen.
They have to halt sales of the second product of Nest Protect of the smoke alarm and carbon monoxide system.
because apparently there was a way for the alarm to accidentally be disabled. Um
You had one job to do.
And and so it's a it's a pretty bad thing if your smoke doesn't doesn't go off. So they have to recall all the units that are on the shelves at all their retail partners. Um fortunately for
units that are already installed, they're able to do an over the air software update. Um but but not a good way to to start under uh under new ownership of Google.
Uh
Then the next thing that happens.
Uh with with not protecting your customers' homes. Um
Yeah. In June twenty fourteen.
Um
Nest acquires Dropcam, uh, which was a very cool company. They made uh inner Wi-Fi connected um
uh cameras that you could drop around your home, hence drop cam. Um and apparently Google Corp Dev, uh Google the Parent Company had been pursuing this deal for a while, uh and then kind of sent it over to Nest and said, Hey, we want to acquire this, like why don't we make this part of Nest? Um and Nest says okay, they acquire it.
And it's basically a
Complete disaster from a cultural uh standpoint. Um so didn't the founder leave like immediately.
Well, not immediately, but uh there's even more drama than that. So so
Drop cam.
The founder, Greg Duffy, uh, he had worked for Zobni, uh, which is inbox backwards. Um that was one of Y Combinator's first companies, uh, in one of the first batches of Y C. And that was like reportive, right? Like it was like a Gmail plugin CRM type thing. Yeah.
Yeah, it was like a I think it was like an Outlook uh plug in CRM. Um
And I actually got it confused with um
Plaxo, which was trying to do the same thing, which was Sean Parker's start up after Facebook. Um
Or no, before Facebook.
Anyway.
Uh so that's kinda the DNA that that
Greg, Duffy, the founder of Chaff Cam came from, was like
Right out of school, joins this Y C company in the first batch, he's there for two years, he starts drop cam.
Uh a lot of the folks at Draft Cam would then go on to like
Plenty of other like, you know, new startups in the valley afterwards. So it's it's kind of a young, like, you know, scrappy team.
Um
Super different from like the apple DNA that uh Tony and Matt are bringing to uh are bringing to Nest.
Um
So
Basically nothing happens. Uh they had this roadmap, uh, and the next major product that Nest was working on was a security product, like a home alarm uh system.
And Dropcam had also been working on a security product, uh, I think called
Tabs.
Um
But Nest put drap and and that was like pretty close to launching.
Nest puts.
Drop cam security product on indefinite hold.
moves everybody over to working on the Nest product and it just keeps getting delayed and delayed and delayed and doesn't ship.
And so like a year goes by
And uh
And and Greg, Duffy the the draft cam CEO
He's really frustrated.
He sends a memo to Larry Page saying that uh Tony email the CEO directly. Email the CEO. He email he email this is all reported on and uh and then later published. Uh
Uh he emails uh Larry Page and basically says
Tony is completely mismanaging Nest. Uh he should be fired and I should be the CEO of Nest. Oh God, we've seen this story before. Yeah, and it's uh
predictively does not play well for anybody, really. Uh
First of all, Greg. So Greg uh
pretty immediately after that leaves the company. Uh Larry Larry sides with Tony.
Um
And uh and as this story gets even worse, so Greg's leaving
And Tony then is is interviewed in an article by the information.
Um and he badmouths
Not just Greg, but the whole drop cam team. Um, and says that they were
Not as good as we hoped.
Uh it was a small and not very experienced team. So it just completely throws them under the bus. Um
Not not not good. Not pretty.
In response, Greg writes a medium article, which is still out there, um, basically taking all of his complaints that he emailed Larry about uh with Tony and Nest uh and publishing them uh publishing them for the public, uh and um and implying that uh
Uh Tony took, you know, essentially all of Steve Jobs's personality traits, the yelling and the screaming without his you know product sense. That's right, I remember that. Yeah. Fun stuff. So
Once again, we're not here to opine one way or another unacquired, but uh certainly made for a lot of drama. That's what I'm there for. I mean, speak for yourself, David.
Now what you were referring to earlier, Ben.
All while this is going on, another big thing happens at Google.
Two big things actually. First, they hire Ruth Porat to join as CFO. And Ruth had been CFO of Morgan Stanley, uh before coming to Google.
Uh, and and a big part of Ruth's coming, you know, uh as was talked about and and I think it's played out in practice is bringing a lot more structure to Google, um, and uh and particularly financial discipline. Um so she's part of the whole
sort of restructuring of Google into alphabet. Uh and that happens
at towards the end of twenty fifteen.
Now apparently when that happens
all of those agreements between Nest and Google got redone. So the the five year runway, the lack of financial accountability, um
If it existed in the first place, it certainly doesn't anymore once Nest gets
pushed out as its own independent company under Alphabet. Uh and part of this too, if I recall, was that that w during the acquisition there was super, super heavy
uh incentives for the management team and key engineers to stay at Nest, right? Like they I think they couldn't
They couldn't sell their
Um
No way, it was a cash deal. So may maybe they just didn't get Google stock awards or something for an extended period of time. Um or it could have been Escreve.
Mm.
Mm.
But yeah, I I do remember uh you know, there was it was an abnormal uh um
sort of abnormally long retention period.
And I suspect that is definitely the case because now some now some just weird behavior starts starts occurring. So um at the very end of the year
There start to be rumors that Alphabet's looking to sell Nest. That Nest hasn't been able to ship products. They're not realizing their vision of, you know, what Google
uh an alphabet really care about, which is like the operating system for the connected home. Um
And and and
Tony uh of course is really unhappy about this. Uh
But for
Whatever reason, maybe retention reasons, he stays at uh he stays at Google. He starts also working on the Google Glass team. Uh on on redoing Google Glass to be, you know, less uh darky. Literally looking to maintain the same W two so he gets whatever bonus needs to happen.
You said it, not me. And they also they got so serious into trying to sell nest it had like a project code name called Amalfi.
Project Amalfi.
Mm.
Interesting. I didn't see that. Yeah, failed to find a buyer though.
Yeah.
Well.
Um
And uh
And then
Then
The the icing on the cake that kinda last
Straw on the on the camel's back here is
In May of twenty sixteen, um, a Nest employee files a complaint against Google uh uh with the National Labor Relations Board saying that um
That
Alphabet and Nest fired him uh because he was posting on Facebook about all the leadership issues at Nest. So it's just a firestorm. Uh and then the next month in June 2016, Tony finally leaves Nest.
Um
And and and
Since then, you know, um
Whether all of these problems were on Tony, on Google, on Greg and Dropcam.
Who knows, probably some responsible responsibility is shared amongst all of them.
Um
But things do start to turn around at Nest. So so they bring on a new CEO, Marwan Farwaz, to to replace Tony.
Marwan
came actually first from the cable industry, but then he was part of Motorola and part of Motorola when Google owned Motorola, flashing back to our HTC episode and Android and everything here. Um and he was part of the division that made set top boxes and cable modems uh within Motorola.
Uh, and so he worked with Rick Osterlo, who was head of motor head of motorola under Google, now has come back and is Google's S VP of hardware. So they have a working relationship.
Um
And and once once he joins, things start to move a little farther. So so first big thing that happens, which we're definitely gonna talk about in tech themes.
Google itself launches Google Home in late 2016, which is their Echo, Amazon Echo and Alexa competitor.
Now, interestingly, totally separate from Nest. So it was Google, Google's hardware division that worked on that, not Nest. Wh which when you uh
when you start reading blog posts that are trying to like rewrite history a little bit, they talk a lot about the sort of the shared DNA and collaboration and how we couldn't have done it without working together. And um I think over time they became much more integrated, but yeah, certainly certainly uh was a little odd when Google Home got announced and it had nothing to do with Nest.
Yeah, yeah. Um
But in the meantime, Nest so Nest finally ships a new
camera, uh new drop cam product, uh Nest Cam outdoor. And then they followed that up with NestCam IQ, which is uh actually uses starting to use some of Google's expertise here. They use machine learning to recognize faces uh in the drop cam. So for security features you can tell if it's someone who's supposed to be in your house or not supposed to be in your house.
Um
Late last year they launched a lower uh a lower priced um version of the thermostat, uh I think called the
the nest E, thermostat E or something like that. Um
And then they also finally launched the security product, Nest Secure, after a bunch of bunch of delays, um, along with Nest Hello, which is a smart uh doorbell camera, um, sort of like the ring doorbell.
Um
And then all of that happens.

Yeah.
We we mentioned at the beginning of the this whole history, uh Matt's
Thesis advisor at CMU, uh Yoki Matsuoka, who was the VP of technology, uh,
When all of this um
drama uh really started going down. She actually left Nest in twenty fifteen, uh and she went to Apple um of all places.
Uh and then and then in twenty seventeen she left Apple, came back to Nest, rejoined Nest as CTO in twenty seventeen.
right before they launched the M L uh version of the camera. Um and now she's Nest CTO again.
Wow.
Man, the the horse trading here is pretty amazing.
Everybody cycles through m Apple and Google in some way.
In some way. Uh, and general magic. Yeah. Um well let's let's let me um take a minute here to talk about some of the
the financial numbers that evolve throughout this time and sort of how is Ness doing today and how how did it um you know how was it doing sort of from 2014 on.
You know, it's it's difficult to know exactly. There's some um there's some leaks that have happened, so we know those things. There's things we can infer by uh um
um looking at the large percentage of Google's other bets category, which come from Nest Revenue. And so let's let's dive into those a little bit.
So I mentioned there was a a a um mark that Ness was supposed to hit that was three hundred million dollars a year in revenue.
In twenty fifteen, they did hit that. They had three hundred and forty million in revenue as reported by uh um a leak out of the the division, um and that includes the drop cam revenue. So a lot of people were speculating they probably weren't gonna hit that alone, but having drop cam helped them sort of bolster and and hit that goal.
Um
you know, things uh it was an expensive division to run. It stayed very separately. They've got all this turmoil. So you know in in twenty sixteen they were um they were looking to explore a sale. It didn't happen. Um so okay, let's look at what it in in twenty sixteen, twenty seventeen
um what actually happened in the the other bets category.
So for the first nine months of twenty seventeen
Um
it it did quite well. The the revenues grew by forty five percent and other bets up to seven hundred ninety four million and R exceed and and were on pace to exceed a billion in twenty seventeen. Um it's it's pretty fair to assume that happened.
And it was reported in twenty sixteen that Ness had contributed about three quarters of the other bet's revenue. Um and while the the other um segments of other bets are growing, there's certainly nothing revenue generating on the scale that that Nest is revenue generating. So you know, we we can
You YouTube is not com
Not included in other bets, right? Correct. I believe that rolls up under Google.
I think that's right now, but I haven't actually read
Google's ten K in a while.
I'm I'm not sure if it's a good idea. It's definitely not other bets,'cause it it generates a ton of revenue. It was uh as at least as far as we could tell, a year or so ago was about a about a breakeven business over at YouTube. Yep.
Um
But despite the the growth in revenues, these businesses and other bets continue to lose money. So in uh again in the first three quarters of twenty seventeen, um, they reported two point four four billion in operating losses.
And uh and Google's operating profit rose by twenty
uh by 20% to over$24 billion. So if you look at, you know, the other bets is losing$2.44 billion, um, Google's uh um operating profit as an entire, you know, or actually just the Google division is$24.1 billion.
So you know, losing a colossal amount of money on or in other bets, you know, that's largely attributable to Waymo and a lot of the other um sort of major R D things they're doing. Um
But you know, I gotta imagine this too.
Yeah.
Yeah,'cause there's, you know, three, four new products coming out at at a pretty rapid clip here from Nest, um, and a a lot of hardware R D to get there.
Yep. But it is it it is, you know, we we should look and and and say conservatively that Nest is doing over a half a billion in revenue now.
um annually. And that's and that's and that's gotten better and you know, the last year I think looked really promising for them. Um
They're starting to do more integration with Google Home, but they still feel largely like two separate ecosystems. And um, in fact, Nest, uh Nest integrates quite nicely with Alexa and is kind of an accessory to the
Oh, that's hilarious. Lady A, Ben. Yeah. Lady A. That's right. That's right. I woke her. Um
But yeah, you know, I think uh
Um
We'll we'll get a lot into talking about the sort of vertical horizontal strategy there, but uh Nest products doing well. Is it contributing to the the um operating system of the home effort uh on on Google's part?
You know, TBD.
Well.
I mean
Let's this is the perfect segue into
the finally the end to the history and facts here, which is that uh in the first week of February in twenty eighteen,
There is an announcement that Nest is getting acquired again.
It's just getting acquired.
by Google moving from
the a a wholly separate division under Alphabet in the other bets category being integrated back into Google as part of the hardware team led by Rick Ostello. Um and there's gonna be much tighter integration now between Nest, all of its suite of products, and Google Home and everything that's an Android and everything that's going on. Um
going on on a hard from a hardware standpoint within Google.
Interestingly.
Uh so Matt Rogers, uh the famous co-founder, uh, who actually seems like a really awesome dude, uh was uh uh he stayed at Nest throughout all of this. Uh the day after that announcement, he announced that he was leaving. Um so he'll now be leaving Nest uh and
Both founders are gone. And it'll be fully within Google. He's transitioned to a full time investor, right? He's he's gonna be in venture.
I think that's the that's the plan for now. Um now interestingly, Tony so when Tony left uh uh left Nest uh back in the summer of twenty sixteen, um
He he resumed where he was before starting Nest. He he moved back to Paris. Uh so he and his family moved to Paris. Uh and he's been very vocal that uh
He's gonna live in Paris, you know.
indefinitely now. He has started um
His own
uh venture investing practice with his own money. He hasn't raised any outside money called Future Shape. Um and he's all in on on Paris and very he's given a bunch of interviews very, very anti Silicon Valley. Um
And you can sort of imagine that. I mean, he's had such negative experiences with the biggest companies in the valley. Um
So it'll be super interesting to see how this all plays out. You know, he's still he's funding companies in Europe, uh, and in the US and in the Valley. Um some of his portfolio companies have had
run ins and and fights with Apple, with Google. Uh so he's still very much part of the scene. Um been hanging out in Paris.
Wow. Leave the leave the gloves on, but just hang out far away from the fight. Yeah.
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Alright, acquisition category.
All right.
This this one might be even harder to harder to tell than the history and facts here. Yeah, I mean so th what it comes down to for me is uh
Google
said they were gonna do and what they did.
And so
You know, I mentioned earlier and kind of foreshadowing my my feelings about this
massive amount, you know, two point three five billion of the three point
two billion of the purchase price was attributable to synergies, you know, to we believe that
Um, you know, we'll combine these businesses in some way and it'll bolster our existing business. So when you start walking through Google's existing business, it is
We make a ton of money on search ads because
when people have intent to do anything on the internet, then they they go through Google and
Some and businesses pay the Google tax to to acquire those uh people as customers.
And so that's their business. It's to it be horizontal and broad and touch as many people as possible and uh get as much data about all people as possible so that they can more effectively advertise to them.
It's Google's core business. It's super different than Apple's business of making hardware differentiated by software that they d they charge a premium for. Um
You know, it's it's it's not that business. Nest was making sort of the the
Um
High end hardware.
bets that Apple had made. I mean, Tony came from that business, understood that really well.
And
So when I look at this the synergies, it's it it you would think that what they do with Nest is integrate it into Google and help build that corpus of data and that ecosystem of being a Google user so that they can
better have their core business and and advertise.
What they actually did was
um you know a as a separate business unit for this long.
try and and hedge their bet and say, where does our next, you know, m multi billion or multi-hundred billion dollar innovation come from? Maybe it's an Apple like business that exists next to a Google like business in this subsidiary portfolio called Alphabet and
And it it actually is not a synergy with the Google business that that you know feeds data in there. And it's a it's this separate thing, and it is realizing Tony Fidel's vision, but they flip flop back and forth on it so many times that I think that
two point three billion dollars was just super value destructive. They they
You know, i i if they were gonna build if they were gonna have Nest and do with Nest what they did.
they should have acquired it for, you know, a couple billion less. Um
Or they should have gone harder at this strategy of of synergy. So I'll say what they ended up buying was a business line and massively overpaying for it.

Uh are you saying there's a vertical and horizontal issue here? Uh yeah. I mean I think I I think to me as I was thinking about this, like and I believe me, we had a long time to think about it during that history and facts. Um
I think the problem
Is that
Google didn't
Really know
what category they were buying when they bought it. Right. And there's a c compelling argument for each one, but make one and carry it out.
Yeah, yep, yep. And
And if you think about how it started, like this whole
relationship started well, it really started when, you know, um
When uh when Yuki uh w when Yoki um
uh joined the company and Sebastian Thrun was turned on to what was going on here. Um and then when Sergey saw the prototype, you know, and I think what
W what it seems like that Google got excited about
Rightly so is this idea of like
This could be the next computing platform, you know, after after
Smartphones. Right. Um
And and that probably was the right thing to get excited about. But I don't think they thought through like
How
to what the right way to attack that is. And and I was thinking about this, like the parallels between
Uh
the Google Nest acquisition and the Facebook Oculus acquisition are like really apt, I think, because in both cases, like what was what was hot at the time were these
you know, quote unquote Facebook style acquisitions of we're gonna buy these promising companies, we're gonna let them be independent, we're gonna give them a ton of runway, you know, the the Instagram style, the WhatsApp style. Um
But I think the difference is like those
worked because
Fundamentally those are not
platform companies. Like those are networks and services built on top of computing platforms. But what Oculus and what Nest were trying to do, they were trying to build new computing platforms. And when you're trying to do that, when you're trying to be a
You know, a a a full
full stack hardware software OS company along the lines of of Google or Apple, you need as much resources as possible. And you need like the best engineers in the world and the best product people. Um and if you're, you know, there's a hardware hardware element, the best folks there too.
And so I think leaving them
Separate.
Was kinda like not
Not realizing
the best vision and and and now you see like Oculus is now integrated into Facebook.
And Nest is of course now integrated back into Google. I think if you're gonna make a platform play, you gotta be
have the resources of a platform company. Yep.
And there's there's one thing when I was doing research for this, there's a strategy quote that's like just uh too freaking spot on not to not to use'cause it's a brilliant framework. So if you think about
Um
If you think about what
Amazon did with Alexa.
Like they just
Hang on, I gotta let me turn her off.
Ha ha ha.
If you think about what Amazon did with Alexa
They said there's gonna be a home operating system.
And there's gonna be a a a s center control point for that. And we believe it's gonna be voice. And so we're just gonna build the central controller. And then there's a whole ecosystem around it. And they just went right through the middle, right? They said, This is it. This is this is the this is the heart and soul of this thing. This is the digital hub.
Um and when you look at what Google's strategy was, it's
We don't know exactly how that ecosystem will play out. We know there's gonna be an operating system at the home. This feels like a good vector into it, but what they ended up doing was kind of
creating the the side entry the same way that Microsoft wanted to to own the living room. Um and so they created a gaming console that that fit into an existing market and tried to branch out from there. And so Ben Ben Thompson's quote in in Stratekery, which I think is just a a brilliant, brilliant point is in any new market, it pays off to simply aim for the sweet spot.
Amazon Echo is unabashedly trying to be the key interaction point for an automated home, Nest is more of an attempt to slide through the side door.
And it's so
It's it's such a simple way to think about it. Like if there's an existing market, you have to figure out how you're gonna flank and an attack from
sort of where you think the market is moving rather than where it is today and and then Trojan horse your way into it. If it's a brand new market
Like smart home people've been trying to make a smart home for thirty years and and like it just hasn't happened. And we're in this era now with with um IoT in the home that that
It's it's finally here. It's a reality. And this is the the the timing is exactly right to do it. And so if you're gonna do it, then just
aim right up the middle, create the center control point, you be the bundler, and then you know, then you own the ecosystem. And I think uh it's easy to say now by a couple of
You know.
pundits who do a podcast, but like the the
it really hard to see at the time and and Google
did sort of this side entry strategy and you know now is doing the Google Home thing for their so they're going for the central central control point, but years later lost a lot of market share, lost a lot of ecosystem development. Um and in fact Nest their own thing is integrating with
with uh um their their biggest competitor who's out ahead in the lead. Yep.
Yeah. Well and I think
I think it's also like
All of the history and facts and you know is instructive here that like
The way
Yeah.
I if you're going for that straight down the middle of the new operating system and a new market.
You need the re like startups are not
best equipped to do that. You need the resources of a big company. And I'm thinking like back to Tony when he was launching the iPod at at Apple, like the iPod worked because of iTunes and the iMac, and it was part of the digital hub. Right? The iPod in and of itself, there were plenty of startup MP3 player companies of all types, but like
Apple worked because it had the whole ecosystem and the operating system. Um and and similarly, you know, with Amazon and and Lady A I won't I won't set off your your speech. She's on now.
Nice. Uh with Amazon and Alexa. Um
You know, it was all of the divisions within Amazon that came together to build Alexa. I mean, one of one of my one of my best friends from undergrad was um
uh was one an early PM on Alexa, and they were working on it for years before the first Echo shipped, and he came from AWS and a lot of the team a lot of the early
Alexic team and Echo Team came from that part of the company, not to mention the Kindle and the devices and then all of Amazon's whole ecosystem. It wasn't like we're gonna make a point product.
It was from the beginning, like, you know, this is a this is a computing ecosystem.
Yeah.
And so like for
For Google
And and Facebook with Oculus to then buy these companies and and leave them
You know, independent.
To me is like when you're
when this is the goal is is is not the right way to do it. David, I think that's a great point. I was trying to think of counterexamples and listeners, maybe you can come up with some and and email us acquiredfm at gmail.com. Um
I I don't actually ha I was gonna make the point of like what come on, startups can totally jump start an ecosystem, but uh a lot of times when you think about this, it is like the second or third innovation after a company already gets their foothold. It was when they sway do they start that ecosystem. You had a great point with with the iPod.
Um, even looking back with Microsoft, I mean Windows was after they already had a strong foothold shipping DOS on uh IBM PC and variety of other PCs, like
it it's it's often the second or third swing is when you you take a new ecosystem. When you build the platform. Yeah, and and look at look at Facebook and Google, which have certainly become platform companies in their own right, but their first products were were
Yeah, network.
opportunities and and and network um
products really built on top of existing platforms, you know, on top of the web, uh, in both of their cases.
Yeah. And it was only then after they had that that they then turned it into a platform.
Mm.
Hm.
And to to put it into perspective too how how much getting this this head start um that Alexa got uh really gives them an advantage from from Google Home. Um there was a twenty seventeen uh report in in in September that there was about twenty million uh Echoes that have been sold versus about seven million Google Homes.
Then over the holidays, Amazon announced there were tens of millions, so we should assume, you know, minimum twenty million sold over the holiday season. And so, you know, you're looking at uh I don't know, forty plus million compared to maybe ten or fifteen. It's a pretty you know, assuming they both keep growing on on uh
the the same curve for a while and and you know Google doesn't do something
That is like
totally a hundred percent better and causes people to switch or to you know forget about uh Alexa.
Yeah.
it feels like a winner's been defined here. And I particularly w um friends who went to CES this year said freaking everything how it works with Alexa.
Badge on it.
And then and Well even like, you know you're uh your Lady A that keeps activating in the background, right? Like you've got it all in Sonos in your house, you know. Well the yeah, the cool thing uh so personally I'm not willing to make the bet yet on like
Uh it's funny how like Sonos lets you hedge because they are gonna be rolling out Google Home. Um
You can you can flip it back and forth between the two ecosystems. So I haven't committed yet.
But Oh, interesting. I didn't realize Sonos has changed in their strategy. They decided to be Switzerland.
Ah, interesting. But but the Google Home on other devices isn't ready yet, right? I don't think so.
And and and airplay two isn't out yet either, so Sonos doesn't uh will start bundling in airplay two. I don't I'm assuming not Siri, but we'll we'll be able to work in the Apple ecosystem a little bit.
But it's interesting, like it's such an important head start for Amazon and Alexa, right? Like right now, they're the only game in town for
Third party
computing devices to use the assistant. Totally.
Totally. Um
Yeah.
Interesting. Well,
I feel like
related, you know, what would have happened otherwise, uh is kinda in this camp. I think the interesting thing for me to to think about is like
Would any of what we just talked about
have been different.
Um
In terms of category and strategy.
If um
Let's say
that Sergey had gotten his way and acquired Nest in twenty eleven.
Uh when it was still so young. Yeah, and it didn't have a strong
Well, I mean it already it already had Fidel. It's not like it didn't have a strong culture of its own.
Uh but maybe then maybe Tony and Matt would have become leaders within Google. Yeah.
Well here's the thing is like
W what we glanced over is like

The
The innovation for the home was voice.
Like hands down, that that that is the that's the bundle point for the the home. Yeah. And
Nest wasn't there. Like Nest was doing this very cool smart internet connected uh appliances thing and they'll you know, they're let's say they develop twenty or thirty of those. Like
at what how long would it have taken for Nest to realize oh the center locus of control is putting a voice thing in the in the middle of the home? And Amazon figure that out. And of course Google had Google Assistant on the phones and Siri existed on iPhones, but like
Or actually it wasn't Google Assistant, it was uh
Whatever the okay Google thing. Um
the the the Amazon was really the one to realize that that's that's how we win the home. And so
Uh, I'm not sure that either acquiring Nest earlier or bundling Nest into Google instead of keeping it as its own thing earlier would have necessarily yielded Google producing the Google home one or two years earlier.
Yeah, although
This is I was just thinking about this and looking back on my notes to make sure I got the history right.
If if Google had acquired Nest in twenty eleven
It would have been a very similar playbook to when they acquired Android uh in two thousand five.
An Android
If we remember our history and facts correctly, when uh when Andy Rubin was running it as a startup, the vision was not phones, but to be a Linux based operating system for digital cameras.
Uh which sounds really simple to hear too, but they had the wrong they had the right technology.
And the rate, you know, um
market, but the wrong approach to it.
And then it was within Google that it
You know, it's got
reshaped to become Android we know today. These general magic guys are like ninety percent of the way there, but just need a form factor pivot. Clearly none of them can exist as independent companies. I don't mean that as a dig, like they they've done amazing things. But uh
Uh, but I think it's all part of the same theme though, right? Like when you're talking about building a platform, it's just so hard to do it as an independent company.
Hm.
Well you know.
Uh at the very least.
I would say buying it e earlier. Th there's two ways that this could have gone better for Google.
buy it earlier so you pay less money for it and then you can execute a similar strategy um or uh bundle in with Google and and just have one strategy and understand exactly what you're building and what sort of making a a separate new business line bet on it.
Um I don't I it the question I ha I have no data on is like what happens to Nest if Google doesn't buy them.
And I
Maybe I mean.
It would be Well, they were raising that big funding round, so
They probably been able to continue.
Sure. But but do they come out with an Alexa Google Home type thing?
Like do they do they figure out how to be the ecosystem in your home, or do they just become the best peripherals to integrate with someone else's ecosystem?
It's hard to do without AWS or Google Cloud Engine on the back end'cause so much of
The voice interaction is driven by the server side, you know?
Um
I don't know.
Hm.

Um
Tech themes? Alright.
Tech themes, let's do it. Okay. So my my first tech theme, which is
Uh just reminded me this whole thing

thinking about it reminded me so much of is the the famous uh the famous quote
The Steve Jobs quote which he stole from uh
Oh I'm blanking Ben, you're gonna remember uh the guy you stole it from. But you know, if you really care about software, you care about hardware too. Okay.
Yeah, the Alan Kay quote, you know. When you're talking about um
When you're talking about computing platforms, like
It's not just software, it's not just hardware, it's not just services, it's all three all together. Um
And I think that's like
To my mind a big thing that like
Who knows if Nested remained independent if it could have gone after all that, but
Um
It was it was too focused on just the hardware, you know, and not enough on the software, not enough on the services, and not enough on the ecosystem altogether.
Hm.
That's a yeah, that's a great theme. And it's interesting too in the last
couple of years how it's become not just hardware and software, but hardware and services or hardware software and services. And I noticed um
Um
You know, and and the services are effectively software just running on a different different piece of hardware and then coming down to yours. But earlier when I was saying um you know, Apple's business model is is hardware that's differentiated by software. It's differentiated now by software and services. And it's so um
You know, the the game has changed and the table stakes are are are now all three of those when it was just the two when Alan K came up with a quote.
Yeah.
Yep. That's my first one I got. Uh and then and then the other one we've also talked about, but which is
You know.
In some ways I think you could listen to what we're saying here and if you buy it, uh
It could be discouraging for startups. Um but I think it's actually just more like
A lesson about how to
How to
Stair step as a start up, you know, to borrow another Ben Thomps term. Um
Which is that you can't start with the platform in mind. Uh, but you can start with
a product and a product that has a network effect. Uh and then you can use that to then in the next generation
Bridge in two.
the platform. And and you've seen this. I mean, again, this is how Google, this is how Facebook started. As you pointed out, this is really how Microsoft started, too. Um, you know, Apple as well, all of them. Netflix couldn't start producing shows without having previously cheaply gotten all the rights to the other shows and before that have done the DVD distribution business to boost drop the customer base. Like
Y you you need to do a uh
um network effect product first, and then you can have a a a platform that you can build on top or adjacent to it.
Yep.
And I'm and I'm thinking again about Snap, right? Like we haven't talked talked about Snap in a while, but um
Uh
We can certainly argue argue the uh the degree of success here, but like
I think the strategy was right. Like Snapchat is a app with a s very strong network effect. Um
And then, you know, can they
They they've built off that and then can they can they leverage that into becoming a a broader platform, um, like they tried with spectacles.
unsuccessfully. Um but I still think there's something to
what they're doing with AR uh versus what any of the other big platform companies are doing. Um
Uh I you could argue that they are the most successful
you know, AR company out there right now. Um
And uh and and will they be able to stair step up? Um
So anyway.
Hm.
Hm.
Well one for me was timing.
Um
I I remember
My the first time I went and visited Microsoft before working there in
When did I go? Twenty ten, twenty eleven. Um
seeing the smart home, and that was a thing that had existed for like years and years and years. And there was like always this promise of getting to the smart home, but
Uh many companies had failed at at delivering on that over the years. And uh
Yeah, one thing I've been sort of thinking to myself is like why now?
Like why is it actually coming to fruition now? Why are there sonos with Alexa littered around my house and um you know, I can unlock my front door with my phone and
w what is it that finally made it hit a tipping point where it's it's a real market now?
And uh
Um
Nest Nest nailed the timing. I mean strategy be damned like
Um
And and maybe their strategy was just m be the best peripherals and not own the ecosystem, but um
You know, they they really nailed it with
they were about six to twelve months ahead of when people really wanted this stuff, but they weren't five years ahead. And they're they're really starting to hit their stride, I think, with uh with all the products that that people want.
Um
Like I I don't think people
Like people
no longer move into a house and think
Okay, I'm gonna go get an ADT security system.
Like people now for the first time, and I think we're still in the early adapter phase, but it's like, Well, of course I'm gonna s get something that integrates with my you know, whatever my ecosystem is. I'm not just gonna go with the status quo thing.
Um
So I don't know, d w what what do you think? Is it like is it cloud computing? Is it
And why why now? Why today?
Mm.
Long silence. I don't know. I mean this is why uh
Uh I'm trying to think.
In retrospect, I think we can look back on it and we can say
Censors, uh we can say
Um
Uh certainly uh the smartphone was a big part about that you can like control your nest from your smartphone and then existing'cause'cause you wouldn't have cared before that you could com control it from anywhere else,'cause that anywhere else would have been like a website.
Yep. And and and you know, I think one of the piece of the positioning
And functionality that Nest got really right was this idea of being
A learning smart home device, not a smart smart home device. Like it it learned from like when you were home and when you were not home and and all that stuff.
Um
So I think those are enabling factors. But I but I also think like when when Matt and Tony started working on this in
Two thousand ten.
Nobody could
Seeing that. I mean, you maybe you could have seen like the smartphone piece, but like
This is really like the to me what um
What makes really great
product oriented founders is that ability to t take
Take some
Seemingly disconnected pieces.
assemble it together just like Tony did in the six week consulting stint, you know, with Apple for the iPod and s and say
We can take these pieces, put it together. This is why the timing is right for now and why consumers will buy this. And it definitely worked. Like I mean, they sold a lot of thermostats, you know? Um
And uh
Um
And I think it's like because of that vision.
Hm.
Hm.
Good point.
Any other tech themes?

Uh that's that's what I got for now, but I think that's
That's a good uh good seg into grading. Yeah. I mean
I'm so negative on this.
Like I don't know if anybody could tell.
I think um
Yeah, it's a fine business. Uh
It wasn't the big play. They started doing the i the big play pretty late and internally and centrally.
Uh
And they overpaid by a couple billion dollars for the small play.
And
it created a lot of turmoil and PR stuff and
You know.
internal politicking, like
I I think this is a D.
Yeah.
Well, to me, thinking about grading, the biggest uh
The biggest um
Opportunity cost here.
Associated with this whole saga.
was
Being really slow to respond to Alexa.
Um
And like
I'm sure, you know, when Google Home finally did come out and was done primarily through Google and whatnot, you know, I mean
End of twenty sixteen. Like
Wow, that's crazy late.
Crazy late. I mean, not as late as the home pod, you know, which is both late and terrible, it sounds like I mean, good sound, but like terrible as a voice assistant. I we'll see.
We'll see. We'll see. Apple has a different strategy than Google and Alexa have here, so it it
Um
I don't know if it's right or wrong, but I think it's y it's distinct enough where I don't think it should be
what people are trying to make it out to be, which is like Apple releases their exact competitor with these guys.
Right, right, right.

Fair enough, but still app I mean.
Home pot aside, Apple doesn't have a credible competitor to uh to Amazon in the smart home either. You know, nor does Microsoft. Nobody does. Um
So but arguably Google should have been there actually a Cortana piece of hardware? Like there is actually some kind of thing. I just haven't
I said credible comparison.
Uh I'm sure Microsoft does have some sort of competitor. Um it's competing product, but uh
But yeah, I think, you know, again, it's impossible to know, right? But like to me the biggest miss here is not
the money they spend on Nest is not
The corporate drama is not all this stuff. It's like
Why did it take until November twenty sixteen for for Google Home to come out, you know? Yeah. Um
Yeah.
I uh
Yeah.
I think I'm um
sort of with you too on this one. Not because w that I'm gonna go agree with you on a D. Um
Not because Nest is a terrible business. Not because
Uh Tony and Matt weren't super In fact, it's probably a good business.
I mean, it's probably good business and and yeah, and like the product.
Um innovation is great and
You know, um
And I think they do have a really solid team there, as we've talked about. Um
But like
It's not where Google needed to be competing.
Yeah.
I I mean a financial analysis perspective, like
I I do wonder it's probably higher than a D if you're like
If you just think about like okay, in twenty f if you in twenty fourteen dollars, if you pay two point or three point two billion for something and presuming that their growth continues, like when will that investment sort of pay back and what will the
You know, if you look at it like on a fifteen, twenty year horizon, like maybe it actually was a great investment.
But
I just think strategically for Google.
Uh
Wrong bet.
Yeah, a lot of wasted time. Um
All right. Well.
There we are.
Nest. Nest. In ninety minutes or less.
Uh car outside.
So uh I started listening to my new favorite podcast this week. It is called Do Buy Friday.
And uh it is a weekly challenge show hosted by Merlin Mann, Alex Cox, and Max Tempkin. And Alex Cox and Max Tempkin are from Cards Against Humanity, and Merlin Mann is the famed author of the the Productivity Blog back in the day, Forty Three Folders. He's on a bunch of the sort of
um Gruber talk show type type uh podcasts. He's Hot Dogs Ladies on Twitter. Uh he's got another sh couple of shows. He's been on a bunch of podcasts, but he's pedantic
Quick.
uh brilliant and and like
h is very, very into like
productivity hacking and tools and stuff like that. And it it's like the the podcast is hilarious. You you'll get almost no utility value out of it, but it is like three very smart people who are very quick who are uh um
You know, just talking about like a lot of the things that uh apparently make me light up. So um
I I highly recommend it if you like uh um like less serious versions of acquired with uh less less content, less utility, but uh like a lot it's just three people who really enjoy each other's company and it's really fun to listen to. Uh
We're not that serious here on acquired. No. We've gotten more serious though. You listen to the early episodes and you're like, did they even like Google it? And Yeah now we're yeah at the opposite end of that spectrum. Well
Give us some feedback in the Slack. Tell us what you think. Um
That sounds awesome though. Also, Merlin Man, what a great name. Oh yeah, it's a it's an amazing name.
He's got his vocabulary is as good as his name's like you listen to it and you come up with like just awesome ways to express feelings that you didn't realize you had.

Um well my carve out uh is a article by Mark Ericks uh in the California Sunday magazine, um, which I didn't even know was a thing until I I found this link. Um, but this is an incredible
art a piece of reporting. Uh it's very, very long. Um, but it's called A Kingdom from Dust. And it's about um
It's about the farming industry in central California. Um and uh in particular
One
farmer farming company, the wonderful company, which makes um
Uh I think about sixty five percent of the world's almonds and pistachios uh and uh pomegranates, the like palm juice. Remember remember that stuff? Like they make that
A bunch of other brands. Um
And uh Halo, those little mini
Clementine oranges things. Oh yeah. You buy them by the little cardboard box. Yep, yep. They make those.
Um
And it's just this
Super, super in depth uh piece about like the history. This this couple, it's a husband and wife who owns it. They live in Beverly Hills. They had nothing to do with farming before they started buying up all this stuff. Uh, the environmental impact of everything, particularly through the drought in California. Um, and like
It's insane the amount of water that goes into well, first off, central California is a desert. So all the water is is pi either piped in from snow melt or other parts of the state.
Or essentially mined from the aquifer below the earth. Um
And uh
uh the amount of water that goes into like one year's worth of, you know, almond in the Central Valley could like be enough water for San Francisco for a decade. Um and uh and and yet like there's so it's just this really good piece of like
This
husband and wife and company have done a lot of good things for the community there. Um, and a lot of philanthropy. Um, so it's very
Ambiguous. I feel like the author set out to write a very negative piece.
And there are very negative aspects of it, but like it's a very nuanced um
balance take. So really, really good long read if you're looking for something about uh
Um
California and history and
Water.
Well
Cool, I'll have to check it out.
Yeah.
Well I think that's all we got. Yeah, I think I think uh this might be our longest episode, but you know
a storied history at uh
at uh Apple, Google, Nest and and basically talking about sort of what is the next frontier, like what is the next multi multi hundred billion dollar business. It uh it deserves the time.
D.
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