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Google Nest Purchase Seen Improving Smart-Home Gizmo Connections

Google Inc. (GOOG) is jumping into digital home automation with its acquisition of Nest Labs Inc., shining a spotlight on an unproven market that has so far been filled with expensive devices that can’t communicate with each other.

Nest, maker of a smart thermostat that learns users’ preferences and can be controlled from a mobile device, is one of dozens of companies from Parrot SA to Royal Philips NV that have developed everything from plant sensors to light bulbs that link to the Web and can be monitored remotely.

Google’s entry into this fragmented market may help the industry work out the wrinkles faster and speed up adoption, said Jeremy Warren, a vice president at Vivint Inc., which provides smart-home services to 800,000 users. Even so, early adopters of the technology face hurdles such as pricey gadgets that can be difficult to manage, requiring consumers to monitor separate systems and mobile applications for each device.

“The challenge is that you need to have a comprehensive solution, and it has to make sense for customers to spend hundreds of dollars to do it, and to pay you on a monthly basis,” Roger Entner, an analyst at Recon Analytics LLC, said in an interview.

Google, with its experience in creating Android software -- which runs more than 80 percent of the world’s smartphones, from dozens of manufacturers -- could leverage the Nest acquisition to build a similar system for the smart home that would tie different devices together, Vivint’s Warren said.

“They tend to create open platforms, like Android,” Warren said. “That’s great for us: It’s like Wi-Fi, a technology that we can all use to make the process of connecting more and more devices easier and faster.”

Linking Everything

The connected home represents about 5 percent of the total market for Web-linked devices -- known as the Internet of things -- which includes devices ranging from personal computers to home appliances, and may generate $8.9 trillion in revenue by 2020, up from $4.8 trillion in 2012, according to researcher IDC. Less than 2 percent of consumers use systems to remotely monitor or control home smoke or fire alarms, air-conditioning settings or doors, according to an IDC survey last year.

Smart home devices and services are also pricey compared with unconnected gadgets and traditional systems. Nest’s thermostat, for example, costs $249 and its smoke detector goes for $129, while AT&T Inc. charges at least $30 a month, plus equipment, for its Digital Life home-security service.

Home Systems

AT&T is among companies driving the competition, having entered the home-automation market last year with Digital Life, which lets consumers monitor their homes, as well as control lights and doors on the go. It joined security company ADT Corp., Vivint, Comcast Corp. and other telecommunications, cable and device companies that offer installation, maintenance and monitoring services, rather than requiring consumers to find and install individual smart devices on their own.

Google hasn’t said how it plans to use Nest, for which it paid $3.2 billion. In a blog post, Chief Executive Officer Larry Page said, “We are excited to bring great experiences to more homes in more countries and fulfill their dreams!”

To get there, Mountain View, California-based Google, which shaped smartphone software with Android, may seek to encourage other companies to develop inexpensive systems that communicate with each other and ease the process for consumers.

Smaller Providers

Startups from Revolv Inc. to Physical Graph Corp. have been working to address these challenges with cheaper ways to connect various devices in the home. Control4 Corp. (CTRL), a Salt Lake City-based maker of home-automation systems, has seen its stock jump more than 65 percent since Google said it was acquiring Nest.

Nest, which was founded by former Apple Inc. employees who helped create the iPod, began working with developers in September to let them integrate its devices with their home gadgets. ADT, for one, is considering integrating Nest into its home-automation system, even after the Google acquisition, said Arthur Orduna, chief innovation officer at ADT.

“I think it’s really, truly complementary,” Orduna said. “We never saw Nest as a competitor.”

Yet Google’s entry could come at a price. Some industry analysts said the company, which EMarketer Inc. estimates brings in 32 percent of revenue in the digital-advertising market, could use its expanded presence in the home to collect more consumer data to better target ads via PCs, mobile devices -- and perhaps even refrigerators and thermostats. For now, Nest says its privacy policy limits the use of customer information to providing and improving Nest products and services.

Privacy Question

If Google knows that you like to keep your house very warm, for example, it could show you Internet ads for solar panels, which may let you run your home more efficiently, at a lower cost, said Vernon Turner, an analyst at IDC. If a water sensor in the bathroom detects a leak, Google may proactively suggest a plumber.

“It does go back to how much privacy you are willing to let go of if you think it’s not going to hurt you,” Turner said. In return for viewing ads, Google -- or other companies using its services -- could offer home-automation services at subsidized rates, or for free -- and that could spur adoption, he said.

Already, home-insurance companies are considering offering discounts for consumers who install Web-connected smoke detectors and door locks, Frank Gillett, an analyst at Forrester Research, said in an interview.

If Google rolls out ad-subsidized smart-home services, and they take off, other digital home-automation service providers could see prices for their services plummet, Turner said. Google has a track record of disrupting markets by offering free, ad-supported services.

“It’s basically what Gmail did to Microsoft Outlook,” Warren said.

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net

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

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