Acquired - Season 2, Episode 3: Nest

Episode Date: February 20, 2018

Acquired brings it all back home—to the smart home that is—with Google’s 2014 acquisition of Nest for $3.2B. From Nest cofounder Tony Fadell’s first job at General Magic (alongside future Android founder Andy Rubin) to his days as “father of the iPod” under Steve Jobs at Apple, the Silicon Valley history runs deep with this one. But did that make the acquisition a good move for Google in the coming battle with Amazon’s “Lady A” for control over consumers’ homes? We dive in!Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Links:Tony Fadell in the Academy of AchievementSteve Jobs deleting Tony Fadell from his FavoritesCarve Outs:Ben: Do by Friday podcastDavid: A Kingdom from Dust By Mark Arax in The California Sunday Magazine

The color really does have an impact on your brain. 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. There's no shortage of research for this one. There's no shortage of research for this one. There's no shortage of requests for this one. And actually, it's pretty timely with the announcement coming out last week that Google is rolling Nest back into, or I guess for the first time, into 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 going to be about? Cause there was the original acquisition, the 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. We just might cover that. It's true. It's true. So to make sure we're on the same page for the full episode, this is the original acquisition of Nest, where Google actually wired cash to the bank accounts of people who own shares

in Nest. That's so prosaic fan um a couple of announcements 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 or if you want to try it out, please comment on this episode. We're experimenting with how the rise of social podcast apps sort of affects discoverability and would love your comment on this episode to see how it compares to the effect of people leaving reviews on iTunes accounts. So maybe if we mobilize the acquired base, we can help discoverability the show.

If you are new to the show, you can check out our Slack at acquired.fm, over 1100 strong. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation. And they have some new news to share. ServiceNow is the AI platform for business transformation. And they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business. Yep. And as you know from listening to us all year, ServiceNow is pretty remarkable about embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of this.

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slash AI dash agents. So David, I think we've got one piece of follow-up before diving in. Yeah. So we want to do a follow-up on the Apple beats episode, which actually kind of hard to believe was the last episode, just you and me that we did together. We had so many guests and specials since then, which have been great. But in the interim, listener Devin wrote into us about something that we didn't talk about in the Applebeats story. And that's that Dr. Dre has a history of assault back in his earlier days with NWA. 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. And we aren't really equipped on acquired to prosecute the specifics of this or any other case, really. But the documentary that we mentioned the defiant ones addresses it pretty well, and pretty fully. So definitely, you should go watch the movie for lots of reasons. But this is an important one. 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 this show. So thank you, Devin, for calling it out. Yeah. But I think, David, to just underscore your point, 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 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, there are people like any other people and some have good sides some have bad sides um and it's just important to remember that so we'll try and keep that in mind with everyone going forward uh thanks again devon for pointing it out uh and with that let's move on to google and nest um okay so you definitely can't talk about Nest without talking about the well-known and at times controversial, though not as controversial as Dr. J, co-founder, whose name is basically synonymous with the company. Of course, I'm talking about Matt Rogers.

Classic. Matt Rogers is always all over the news. Always all over the news always all over the news matt rogers is the um is the co-founder and uh i believe chief product officer of uh of nest and we're going to 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 this show have heard something about in the past. But who is Tony? Well, so Tony grew up in the 70s and early 80s, primarily in Detroit, although his father was a salesperson for Levi Strauss, the jeans company based here in San Francisco. So they moved around

quite a lot. But Tony turns out was really influenced by his maternal grandfather. So his mom's dad, who also lived in the Detroit area. And he was like, this sounds like awesome kind of depression era, like, you know, self reliant, like, 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 12, he discovered computers, uh, and took that same approach to computers.

So he got an Apple two, he 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 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 he received a award, award um from them and did a big oral history on kind of his uh his background um so we'll we'll see if we can 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 ii he's hooked on computers uh he ends up going to college at the University of Michigan. This is in the late 80s, mid to late 80s. And he studies computer engineering, which is a combination of computer science and electrical engineering. So he's getting both hardware and software in school. And then he also gets an education in entrepreneurship at school. He starts actually not one, but three different companies, uh, while he's at the university of Michigan. Um, the largest, uh, most successful,

which was a 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 kind of, he's got the, he's got the hardware, he's got the software, he's got the entrepreneurship. He's a total Mac nerd and nut. And apparently, he also, he's a subscriber to Macworld. And he reads the magazine religiously. And he hears about this right as he's a senior getting ready to graduate. He hears about this stealth startup in Silicon Valley that was a spin out from Apple. Started by a bunch of legends from

the initial Mac team 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. I have like a shame bag over my head of like calling myself an Apple nerd 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 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 many if not all of those i think are kind of central characters in the steve jobs movie which is another good movie you should all go see if you haven't. And they were like all super well-known in the Mac community. And they left Apple to start this company. And it was totally secret what they were doing. So Tony and nobody else had any idea what they were actually doing. It was just that it was this dream team out in the valley. So 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 30th 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 on star, they'll like, you know, if you've ever driven a Chevy or a GM vehicle, they'll like connected roadside assistant thing. But the vision was to build a connected, an internet connected PDA,

personal digital assistant that people could keep with them, you know, all throughout their day and their lives would be connected to the internet. It could do email, could do phone calls. 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 Omidyar, the Omidyar, I never know. Omidyar,idyar i think yeah omidyar founder of ebay kevin lynch who was the cto of adobe and now runs apple watch at apple um like there's this ridiculous mafia of people that worked at at 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 going to be as much an apple episode as a as a google episode but um with tony fidel you just can't uh you can't stay away 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 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 kind of develops a reputation as a, 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 stodgy company.

He, um, he gets a reputation for like yelling and screaming during meetings and all sorts of stuff. Um, uh, 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 a couple years later 1999 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 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 want to get into music. You know, he could go to Apple. He could do all these things. He's like, I'm going to go to Real Networks, which is the company in Seattle. Yeah, baby. Right in our backyard. Yeah, Real Networks, right in our backyard. Which, speaking of mafias, the mafia of people that came out of Real is pretty insane, too. 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 20 years yeah that and um the aquatic mafia of course too yeah um but anyway so tony takes a job at real he lasts all of six weeks remember he's like the controversial executive here. He stays at Real for six weeks. Something happens. And he decides, you know what? I'm still going to pursue this MP3 thing, but I'm going to do my own startup and do it on my own. So he leaves. He starts a company called Fuse Systems. 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 audio file quality rack mounted, like stereo hardware, like something you would keep next to your, you know, receiver in your home hi-fi system. Next to your home pod. Yeah, next to your home pod. Exactly. He's just he's he's habitually like 20 years ahead of the ahead of the world um so he does that uh he starts the company like i said in 1999 um things go along he raises some money uh but then the dot-com crash happens um and uh and it's 2000 2001 the company even with with Tony's 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 going to become 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 Rubenstein from apple who is

the svp of hardware at at apple and and john had been was a veteran of next so he had joined next when steve jobs was at next then came with steve back into apple 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 2001. They just launched the iTunes software. The store wasn't out yet. And they're looking for potential to build a hardware player to go along with it. 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 1.8-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's like we got to 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 got to come in here 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 because i'm running out of cash at 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 at 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. carving it 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. Um, so, uh, so the other project they, he presents to the whole senior leadership team at Apple, and they're like, okay, great. 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. Let's be clear. How is he doing a consulting gig while running a startup? For anybody running a startup, imagine going and taking on an incredibly important, 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 unclear. This is the

problem with, 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 Fuse. 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 yes yeah well who knows so anyway apple and steve and john uh rubenstein are like great we want to 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 2001 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 kind of, it's pretty amazing from like, it's, it's like 10 months from when Rubenstein sees the 1.8 inch hard drives at Toshiba, uh, in Japan, uh, till they, they ship the iPod in October of 2001. 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, to be able to do that in 10 months, totally mind blowing.-blowing. And I promise this is all leading to Nest eventually. So Tony stays on at Apple after they ship the first iPod. He ends up working on the next 18 versions of the iPod. And in 2006, John Rubenstein retires and Tony replaces him as SVP 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, 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 2005, uh, and it's Matt and he shows up and, uh, and he gets, they sit him. 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 entrepreneurial thought leaders talk uh with uh at stanford um a couple 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 you know he was like fetching printer paper he was traveling so happy to be working at Apple, so happy to be working on the iPod team. 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. So he makes a big impression on Tony. And apparently at the end of the summer, Tony gives him a cash bonus for his work during the summer, which like the Apple and the iPod team had never done before.

Matt was the only person 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 2006 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 think Tony's was purple one. Um, and it was the, the plan was they were going to 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 10 and 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 10th 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 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 incredible capacitive touch 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 completely revolutionary you know compared to like the rio players and the Walkman that came before it, like it was a completely different experience. And, you know, companies companies rarely have like that that dominant of an innovation twice or you could argue multiple more times after that, too. Yeah, it's it's pretty amazing. And it all comes from different people within apple um and uh so um obviously scott forestall's team with the multi-touch wins the battle the battle of the

code name purple uh iphone future 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 20th january 2007 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 the favorites tab, and it's all visual, and this is all new. And then he talks about like,

well, and you know, it's easy to remove somebody. And he removes a contact from his favorites. The contact he removes is Tony Fadell. No way. Cold blooded. It's brutal. And of course, nobody knew, but apparently, you know, there are you know a bunch of interviews now afterwards now 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. And so it's now late 2007, 2008. He's left Apple. His wife, who he had met at Apple, they both leave. And they're like, all right, we're done with this. This is too much. We're going to spend some time with our kids. They have young kids.

They do two things. One, as you mentioned,ony always loves skiing he loves tahoe uh they decide they're going to build their dream vacation home in tahoe uh and they're going to 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 10 years um so they start they start building the tahoe 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's kind of 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'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 70s and had all this old you know 70s style equipment in there and matt's also trying to kind of 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 is, we got to 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 all the pretense is gone because you both left the company and you have, this happened to me just a couple of times and you're like, oh my gosh, like that 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. So, so Tony's like, yeah,

I don't know. I'm kind of enjoying this, you know, Paris thing, but you know, maybe, maybe like you work on it and you see, see kind of what's there.

So Matt throws himself into this. He's still at Apple. He starts doing a ton of market research he gets tony 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 matt was still still at apple doing this 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 thinks about all the like great stuff and great creations in there. And he's like, you know what? I'm not done. I want to get back in there. And so he calls Matt up from a bridge over the Seine. What a setting right there. What a setting.

And he's like, I'm in. We're doing it. 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 moved back. He becomes CEO and they decide that they're going to name the in June. Uh, he and his wife moved back, he becomes CEO and they decide that they're going to name the company nest. Cause you know, the goal is, I don't think they've even landed fully on, on doing thermostats yet. Uh, but they want to reinvent the home and they're talking about the, like, 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 they should have just called it crib yeah i know they should have called it cribs maybe maybe it would be you know they would be doing better in google but whoa david 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, folks they'd worked with. They recruit some folks from General Magic. And then they make one really key hire. They're able to land Matt's thesis advisor from CMU. It's a woman named Yoki Matsuoka, who is a pretty incredible person. So in a couple of years since Matt was at CMU, she'd left academia to co-found Google X with Sebastian Thrun. She was a robotics expert at CMU and then actually at the University of Washington in Seattle.

And so she co-founds Google X with Sebastian Thrun. She also gets awarded the MacArthur Genius Grant for her work. And she'd 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 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 a lot of he's still running google x while he's still running google x yeah um so september of that year 2010 uh they raise a nine and a half million dollar series a from kleiner perkins and shasta

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 generation of both products, hardware products, to make the home more intelligent, but also the software layer and the operating system that's going to bring it all together. So they raised their Series A. And then apparently in early 2011, so they don't ship the product until they take a whole year, October, 2011, they ship the product in early 2011 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 going to be the next, you know, after, after smartphones, the home is going to 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 a bot at that stage. Yeah. Well, we may be, we'll have to save it for what would have happened otherwise. That's right. Um, and, and so it's worth like touching on, you know, now this doesn't seem as revolutionary, like, Oh, of course the smart home, you know,. And so 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 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, you know, announcing like, at some point we'll ship this thing and you can get information and updates

here. And just 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 it was just kind of prescient. Yeah. Well, and I feel like there's a lesson here because the same thing happened with Rover, which started right around the same time, almost exactly at the same time. There were all these tech crunch articles like Airbnb for dogs, like this is a sign of the apocalypse. Silicon Valley is over. Well, and people thought Aaron, the CEO of Rover,

people thought he was nuts for going and doing this. Total nuts. Yeah. I mean, Aaron had a super successful career. Actually, it was somewhat similar to Tony, although I think Aaron's personality and Tony's personality are polar opposites, probably. But Aaron was the youngest GM at Microsoft ever. He came from, from a quantitative

when Microsoft acquired that and that he would go work on, you know, Airbnb for dogs. It's crazy. And yet both of these companies, you know, turn out to be quite important. So Fidel from reinventing consumer electronics to make becoming a thermostat maker. Yeah. Well when, if somebody makes fun of your startup, you should probably take that as a compliment. If people care enough to makes fun of your startup, you should probably take that as a compliment. If people care enough to make fun of your startup. Or at least it's still likely to fail, but if people aren't making fun of it, you know for sure it's not going to be huge. Yeah.

So the next year, October 2011, as I mentioned, they launched the product Nest Learning Thermostat. There's a ton of buzz, ton of hype. They raise a $55 million Series B, which remember, this is back October 2011. Like we're not yet in the steroid era of, you know, like super rounds for startups. This is one of the early, like a $ 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 and the fact that they're making you know expensive hardware that's a yep um yeah startups are making um yeah i mean it just like it, it's a super capital intensive business to do that R and D in production.

Yep. 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 would end up owning at at the time of acquisition foreshadowing a little bit 12 of the company before even buying it yep yep um so that was at the end of 2011 2012 they launched the second generation of the thermostat

which is compatible with a bunch more homes and wiring systems uh uh, gets up to, I, I believe with that version up to like 85, 90% of home, uh, home wiring systems are, are compatible with, with the nest, the second version of the nest. Um, then January, 2013, they raised their series C, they raise $80 million at a $800 million pre-money valuation. Um, and they, it gets announced that they're shipping on the order of 50,000 thermostats per month, um, which at a, which at a price of $250 per thermostat puts them well over a hundred million dollar annual revenue run rate. Now, as you pointed out, this is hardware revenue with a bunch of costs and expenses associated with it. This isn't Facebook here.

This is, this is not Facebook, but still, that's pretty impressive. About 15 months after launching the product and what is that, less than three years after starting the company or just about three years from starting the company. No, less than three years at $100 million revenue run rate. And I believe not profitable. I think they went all the way through the acquisition and years after, maybe even today, it's not totally clear, but not profitable revenue. Yeah, not totally clear, but it seems unlikely, especially given how much money they were raising. Presumably they were doing that for a reason. And so then later in 2013, they launched the second product, which was hotly anticipated.

They'd always talked about the vision of being a fully connected home. And it's funny, the same thing happens. It's a smoke detector, a smoke detector and carbon monoxide detector. And everybody's like, smoke detector? Come on. This is Nest's next product. And we'll come back to the smoke detector later. But that was October 2013.

In January 2014. So a couple months later, it gets reported that Nest is now going to be raising a monster round from DST, from Yuri Milner's investment firm that invested in Facebook and many others. They're going to be raising over $200 million at a $3 billion valuation. But instead, on January 13th, it gets announced that Google is finally acquiring the company for $3.2 billion in cash. But Ben, as you pointed out, they already owned 12% of the company. Yeah. And at this point, still only 280 employees. I mean, to be purchased for that price, making hardware with supply chain and full operations logistics, retail on their website, channel to retail partners, full R&D team, only 280 employees. It's impressive. I mean, it's 11 million bucks per employee. It is, it is. And, you know, remember too, like, you know, you mentioned channel, like that means, you know, Best Buy, that means Lowe's, that means Home Depot, that means not just building the relationships with those retailers,

but, you know, getting product in shelves, keeping 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 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 announced they're very clear this is going to be like youtube gonna you know tony's to remain wholly independent. So Google is still Google at this point. There's no alphabet yet. But they announced they're very clear this is going to be like YouTube. Tony's going to remain CEO, the management team. Matt and Yoko and everybody else

are going to stay independent, going to have their own offices. Which is very much a Tony demand. We're not getting bought by Google to be integrated and me to have a boss. I get my own P&L 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,. And so supposedly there was a term in the, in the deal. It's not public, no way to know, but it's been reported that there was a term in the actual documents that nest was given a five years runway 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 and no accountability for any sort of profitability or revenue growth, supposedly in the in the deal. And then is it later that they wanted them to hit $300 million a year of revenue. There was some target set there at some point. Yes, yes. Okay, so that was January 2014. That was basically the high water point for Nest, or at least for Nest and Google's relationship. And here's an interesting data point on that too.

So from Google's 10Q that they filed with the SEC a few months after this happened, they talk about how they came to value the deal. And so they say the fair market value of our previously held equity interest was $152 million. So that's that 12%. $51 million was cash that they acquired from the last fundraising round or however they were generating cash at Nest, 430 million was attributed to intangible assets, 157 million to net liabilities assumed, and 2.35 billion dollars attributed to goodwill that is primarily for the synergies expected to arise after the acquisition.

So, you know, this is not 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? $51 million in cash, uh, at the company that acquired. Yeah. Okay. okay so and they had raised at that point about 145 150 million dollars so that means they burned roughly 100 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 employees as as you mentioned um okay so that was january 2014 now the bad news starts uh april 2014 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 through you had one job to do and and so it's a pretty bad thing if your smoke alarm 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 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 to start there, uh, with, with not protecting your customer's homes, june 2014 um nest acquires drop cam uh which was

a very cool company that made uh in 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 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 that 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 Zobny, uh, which is

inbox backwards. Um, that was one of Y Combinator's first companies, uh, in one of the first batches of YC. 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's like an outlook yeah 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

startup after facebook um or no before facebook anyway uh so that's kind of the dna that that greg duffy the founder of job cam came from was like right out of school, joins this YC company in the first batch is there for two years. He starts Dropcam. Uh, a lot of the folks at Dropcam 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 Nest. So basically nothing happens. They had this roadmap, and the next major product that Nest was working on was a security product, like a home alarm system.

And DropCam had also been working on a security product, I think called Tabs. But Nest put DropCam, 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 d the, the job cam CEO, he's really frustrated. He sends a memo to Larry page saying that, uh, Tony is always email the CEO directly email the CEO. He emails, he emails, uh, 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 nasta oh god we've seen this story before yeah and it's uh predictably does not play well for anybody really uh first of all greg so greg uh pretty immediately after that leaves the company company. Larry sides with Tony. And as this story gets even worse, so Greg's leaving. And Tony then is interviewed in an article by the Information. And he badmouths not just Greg, but the whole Dropcam team. And says that they were, quote, not as good as we hoped.

It was a small and not very experienced team so 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 and implying that Tony took, you know, essentially all of Steve Jobs' 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 on Acquired, but certainly made for a lot of drama. That's what I'm here for. i mean yeah speak for yourself david so 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 stan Morgan Stanley before coming to Google. And a big part of Ruth's coming, you know, as was talked about, and I think it's played out in practice, is

bringing a lot more structure to Google and particular financial discipline. So she's part of the whole sort of restructuring of Google into Alphabet. And that happens towards the end of 2015. Now, apparently when that happens, all of those agreements between Nest and Google got redone. So the five-year runway, the lack of financial accountability, if it existed in the first place, it certainly doesn't anymore once Nest gets pushed out as its own independent company under alphabet and part of this too if i recall was that that 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 maybe they just didn't get google stock

awards or something for an extended period of time um or it could have been escrowed but yeah i do remember 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 starts 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 and 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 redoing google glass to be you know less uh dorky literally looking to maintain the same w2 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 interesting i didn't see that and failed to find a buyer though yeah wow um and uh and then then the the icing on the cake the kind of last straw on the on the camel's back here is in may of 2016 um a nest employee files a complaint against google uh uh with the national labor relations Board saying that that Alphabet and Nest fired him because he was posting on Facebook about all the leadership issues at Nest. So it's just a firestorm. And then the next month in June 2016, Tony finally leaves Nest. And since then, you know, whether all of these problems were on Tony, on Google, on Greg and Dropcam, who knows, probably some responsibility is shared amongst all of them.

But things do start to turn around at Nest. So they bring on a new CEO, Marwan Farwaz, to replace Tony. And 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. And he was part of the division that made set top boxes and cable modems within Motorola. And so he worked with Rick Osterloh, who was head of Motorola under Google, now has come back and is Google's SVP of hardware. So they have a working relationship. And once he joins, things start to move a little farther. So first big thing that happens, which we're definitely going to 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. Which when you, 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. 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 a new drop cam product uh nest cam outdoor and then they followed that up with

nest cam i, which is, uh, actually uses starting to use some of Google's expertise here. They use machine learning to recognize faces, uh, and 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 sort of like sort of sort of like inspired by yeah all that happens uh 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 when all of this um drama uh really started going down she actually left nest in 2015 and she went to apple um of all places uh and then and then in 2017 she left apple came back to nest rejoined nest as cto in 2017 right before they launched the ml uh version of the camera and now she's Nest CTO again. Wow, man, the horse trading here is pretty amazing. Everybody cycles through Apple and Google in some way. In some way, and General Magic.

Yeah. Well, let me take a minute here to talk about some of the financial numbers that evolved throughout this time and sort of how is Nest doing today and how was it doing sort of from 2014 on. It's difficult to know exactly. There's some leaks that have happened, so we know those things. There's things we can infer by looking at the large percentage of Google's other bets category, which come from Nest revenue. And so let's dive into those a little bit. So I mentioned there was a mark that Nest was supposed to hit that was $300 million a year in revenue. In 2015, they did hit that. They had $340 million

in revenue as reported by a leak out of the division. And that includes the Dropcam revenue. So a lot of people were speculating, they probably weren't going to hit that alone, but having drop cam helped them sort of bolster and, and hit that goal. You know, things, it was an expensive division to run, it stayed very separately, they've got all this turmoil. So you know, in 2016, they were, they were looking to explore a sale, it didn't happen. Um, so, okay, let's look at what in, in 2016, 2017, um, what actually happened in the other bets category. So for the first nine months of 2017, um, it, it did quite well. The, the revenues grew by 45% and other bets up to

794 million and our exceed and we're on pace to exceed a billion in 2017 um it's it's pretty fair to assume that happened and it was reported in 2016 that nest had contributed about three quarters of the other bets revenue um and while the the other 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 and youtube is not come not included in other bets right correct i believe that rolls up under google i i think that's right now but i haven't actually read google's 10k in a while i'm not sure it's definitely not other bets because it generates a ton of revenue

at least as far as we could tell a year or so ago, it was about a break-even business at YouTube. Yep. But despite the growth in revenues, these businesses and other bets continue to lose money. So again, in the first three quarters of 2017, they reported $2.44 billion in operating losses. And Google's operating profit rose by 20% to over $24 billion. So if you look at the other bets is losing $2.44 billion. Google's operating profit as an entire, or actually just the Google division is $24.1 billion. So losing a colossal amount of money over other bets, that's largely attributable to Waymo and a lot of the other sort of major R&D things they're doing.

But, you know, I... But you got to imagine Nest too. Yeah, yeah. Because there's, you know, three, four new products coming out at a pretty rapid clip here from Nest and a lot of hardware R&D to get there. Yep. But it is, you know, we should and and say conservatively that nest is doing

over a half a billion in revenue now um yep 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 it's 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 get a lot into talking about the sort of vertical horizontal strategy there. But Nest products doing well, is it contributing to the the operating system of, which is that in the first week of February in 2018, there is an announcement that Nest is getting acquired again. It's just getting acquired

by Google, moving from 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 Osterloh. And there's going to 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, going on on a hard from a hardware standpoint within Google. Interestingly, so Matt Rogers, the famous co-founder, who actually seems like a really awesome dude, was he stayed at Nest throughout all of this. The day after that announcement, he announced that he was leaving.

So he'll now be leaving Nest and both founders are gone and it'll be fully within Google. He's transitioned to a full-time investor, right? He's going to be in venture. I think that's the plan for now. Um, now, interestingly, Tony, so when Tony left, uh, uh, left nest, uh, back in the summer of 2016, 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 going to 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 feature 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. So it'll be super interesting to see how this all plays out. He's still he's funding companies in Europe and in the US and in the Valley. Some of his portfolio companies have had run ins and fights with Apple, with Google. So he's still very much part of the scene, but hanging out in Paris. Wow. Leave the gloves on, but just hang out far away from the fight. Yeah. All right, listeners, our next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to mid-sized businesses and provides enterprise-grade security with the technology, services, and expertise needed to protect you. They offer a revolutionary approach to managed cybersecurity that isn't only about tech, it's about real people providing real defense around the clock. So how does it work? Well, you probably already know this,

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and the industry leader in managed detection and response again this summer. Yep. So if you want cutting edge cybersecurity solutions backed by a 24-7 team of experts who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. All right, acquisition category. All right. This one might be even harder to tell than the history and facts here. Yeah. I mean, so what it comes down to for me is what Google said they were going to do and what they did. And so, you know, I mentioned earlier and kind of foreshadowing my feelings about this massive amount, you know, 2.35 billion of the 3.2 billion of the purchase price was

attributable to synergies, you know, to we believe that, 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 people as customers. And so that's their business. It's to be horizontal and broad and touch as many people as possible and 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 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 you would think that what they do with nest is integrated 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

advertise. What they actually did was, you know, as a separate business unit for this long, try and hedge their bet and say, where does our next, you know, 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 it actually is not a synergy with the Google business that feeds data in there. And 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 $2.3 billion was just super value destructive. They, you know, if they were going to build, if they were going to have Nest and do with

Nest what they did, they should have acquired it for, you know, a couple billion less or they should have gone harder at this strategy of synergy. So I'll say what they ended up buying was a business line and massively overpaying for it are you saying there's a vertical and horizontal issue yeah i mean i think 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 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, when 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 i was 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 going to buy these promising companies. We're going to let them be independent. We're going to give them a ton of runway,

you know, the Instagram style, the WhatsApp style. 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, trying to build new computing platforms and when you're trying to do that when you're trying to be a you know 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 kind of like not, not realizing the best vision. 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 going to make a platform play, you gotta be, have the resources of a platform company. Yep. And there's, there's one thing when resources of a platform company yep and there's there's one thing when i was doing research for this there's a stratechery quote that's like just it's too freaking spot on not to not to use because 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 if you think about what amazon did with alexa they said there's going to be a home operating system and there's going to be a a center control point for that and we believe it's going to be voice

and so we're just going to 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 the heart and soul of this thing. This is the digital hub. 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 going to be an operating system of the home. This feels like a good vector into it.

But what they ended up doing was kind of creating the side entry, the same way that Microsoft to to own the living room and so they created a gaming console that that fit into an existing market and tried to branch out from yeah and so ben ben thompson's quote in in stratechery which i think is just 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 such a simple way to think about it. Like if there's an existing market, you have to figure out how you're going to flank

and attack from sort of where you think the market is moving rather than where it is today. And then Trojan horse your way into it. If it's a brand new market like smart homes people have been trying to make a smart home for 30 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 timing is exactly right to do it and so if you're going to do it then just aim right up the middle create the the center control point, you be the bundler, and then, you know, then you own the ecosystem. And I think it's easy to say now by a couple of, you know, pundits who do a podcast, but like the, the really hard to see at

the time 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 yeah 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 if you're going for that straight down the middle of the new operating system in a new market, you need the 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 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 speed. She's off 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 Alexa 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 going to make a point product. It was from the beginning,

like, you know, this is a computing ecosystem. Yeah. And so like for, for Google 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. Yeah. David, I think that's a great point. I was trying to think of counter examples and listeners, maybe you can come up with some and email us acquiredfm at gmail.com. I don't actually, I was going to make the point of like, what, come on, startups can totally jumpstart an ecosystem. But 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, they start that ecosystem. You had a great point with,

with the iPod. Even looking back with Microsoft, I mean, Windows was after they 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 ibm pc and variety of other pcs like 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 look at look at facebook and google which have certainly become platform companies in their own right but but their first products were, were, you know, 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. And to put it into perspective to how much getting this this head start that Alexa got really gives them an advantage from from Google Home. There was a 2017 report in September,

that there was about 20 million echoes that have been sold versus about 7 million Google Homes. Then over the holidays, Amazon announced there were tens of millions. So we should assume, you know, minimum 20 million sold over the holiday season. And so, you know, you're looking at, I don't know, 40 plus million compared to maybe 10 or 15. It's a pretty, you know, assuming they both keep growing on the same same curve for a while and and you know google doesn't do something that is like totally 100 better and causes people to switch or to you know forget about alexa it it feels like a winner's been defined here and particularly friends who went to ces this year said freaking everything had it works with alexa badge on it and and well

even like you know you're uh you're lady a that keeps activating in the background right like you've got it all in sonos in your house you know well yeah the cool thing i 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 going to 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 oh interesting i didn't realize oh yeah 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 airplay 2 isn't out yet either so sonos doesn't Sonos will start bundling in AirPlay 2. I'm assuming not Siri, but we'll be able to work in the Apple ecosystem a little bit.

But it's interesting. It's such an important head start for Amazon and Alexa, right? Right now, they're the only game in town for third-party computing devices to use the Assistant. Totally. Totally. Yeah. Interesting. All right. assistant totally totally um yeah interesting all right well i feel like related you know what

would have happened otherwise uh is kind of 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 2011 when it was still so young yeah and it didn't have a strong well i mean i already already had fidel it's not like it didn't have a strong culture of its own but maybe then they wouldn't maybe tony and matt would have become leaders within google yeah well here's the thing is like 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 appliances

thing and they'll you know they're let's say they developed 20 or 30 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 middle of the home and amazon figured that out and of course google had google assistant on the phones and siri existed on iphones but like actually it wasn't google assistant it was uh whatever the okay google thing um 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, I was just thinking about this and looking back on my notes to make sure I got the history right. If Google had acquired Nest in 2011, it would have been a very similar playbook

to when they acquired Android in 2005. And Android, if we remember our history and facts correctly, 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, which sounds really simple. That's right. They had the right technology and the right market, but the wrong approach to it. And then it was within Google that it you know has got reshaped to become android we know today these general magic guys are like 90 of the way there but just need a form factor pivot this 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 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. Well, you know, at the very least, I would say buying it earlier. 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 or bundle it in with Google and and just have one strategy and understand exactly what you're building and why um rather than than sort of making a a separate new business line bet on it um yeah i don't i the question i i have no data on is like

what happens to nest if google doesn't buy them and i maybe i mean it would well they were raising that big funding round so they probably would have 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 because so much of the voice interaction is driven by the server side you know um i don't know i don't know um tech themes all right tech themes let's do it okay so my my first tech theme which is uh just reminded me this whole thing as i was thinking about it reminded

me so much of is the the the famous uh the famous quote the steve jobs quote which he stole from uh i'm blanking ben you're gonna remember uh the guy he stole it from but you know if you really care about software oh you care about hardware too yeah the alan k 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 altogether. 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 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 services. And I noticed, um, um, you know, and, and services

are effectively software just running on a different, different piece of hardware than 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 Kay came up with a quote. Yep. Yep. That's my first one I got. 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 it could be discouraging for startups. But I think it's actually just more like a lesson about how to how to stair step as a startup you

know it's borrow another Ben Thompson term which is that you can't start with the platform in mind but you can start with a product and a product that has a network effect and then you can use that to then in the next generation bridge into the platform 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 bootstrap the customer base like you you need to do a network effect product first and then you can have 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 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 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 i you could argue that they are able to stair step up um so anyway well one for me was timing um i remember my the first time i went and visited microsoft before working there in when did i go 2010 2011 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 many companies had failed at delivering on that over the years. And 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 what is it that finally made it hit a tipping point where it's it's a real market now and um nest nest nailed the timing i mean strategy be damned like um and and maybe their strategy was just be the best peripherals and not on 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 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 adopter phase but it's like well of course i'm gonna get something that integrates with my you know whatever my ecosystem is i'm not just going to go with the status quo thing um so i don't know what what do you think is it like is it cloud computing is it why why now why today 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 sensors uh we can say um certainly uh the smartphone was a big part about that you can like control your nest from your smartphone and that existing because because you wouldn't have cared before that you could control it from anywhere else because that anywhere else would have been like a website. Yep. 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 learned from like when you were home and when you were not home and all that stuff. So I think those are enabling factors. But I also think like when Matt and Tony

started working on this in 2010, nobody could have seen that. I mean, maybe you could have seen like the smartphone piece, but like this is really like that to me, what makes really great product-oriented founders is that ability to 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, 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 um and i think it's like because of that vision that's a 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 it's a fine business. It wasn't the big play.

They started doing the big play pretty late and internally and centrally, and they overpaid by a couple billion dollars for the small play. And it created a lot of turmoil and PR stuff and internal politicking. I think this is a D. Yeah. Well, to me, thinking about grading, the biggest opportunity cost here associated with this whole saga was being really slow to respond to Alexa. I'm sure when Google Home finally did come out and was done primarily through Google and whatnot, end of 2016, wow, that's crazy late. Crazy late. I mean, not as late as home pod you know which is both late and terrible it sounds like i mean good sound but

like terrible as a voice assistant hey we'll see we'll see we'll see i mean apple has a different strategy than google and alexa have here so it um i don't know if it's right or wrong but i think it's it's distinct enough where i don't think if it's right or wrong but i think it's 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 i mean home pot aside apple doesn't have a credible competitor to uh to amazon in the smart yeah that's the home either yeah you know nor does microsoft nobody does um so but arguably google should have been isn't there actually a cortana piece of hardware like there is actually some kind of thing i just haven't i said credible competitor

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 spent on nest is not the corporate drama is not all this stuff it's like why did it take until november 2016 for for a google home to come out you know yeah yeah so i uh i think i'm i'm sort of with you too on this one not because 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 mean from a financial analysis perspective, like I do wonder, it's probably higher than a D if you're like, if you just think about like, okay, in 2014 dollars, if you pay 2.3.2 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 15, 20 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. There we are. Nest. Nest. In 90 minutes or less. Uh, carve outs. Carve outs. 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 man alex cox and max temkin and alex cox and max temkin are from cards against humanity and merlin man is the famed author of the productivity blog back in the day, 43 Folders. He's on a bunch of the sort of Gruber talk show type podcasts. He's Hot Dogs Ladies on Twitter. He's got another couple of shows. He's on a bunch of podcasts, but he's pedantic, quick, brilliant,

and is very, very into like productivity hacking and tools and stuff like that. And 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 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 Google it? Yeah, now we're at the opposite end of that spectrum. Well, give us some feedback in the Slack. Tell us what you think. That sounds awesome, though. Also, Merlin Mann, what a great name.

He's so good. Oh, yeah, it's an amazing name. And 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 erics uh in the california sunday magazine um which i didn't even know was a thing until I found this link. But this is an incredible piece of reporting. It's very, very long, but it's called A Kingdom from Dust. And it's about the farming industry in Central California um and in particular one farmer farming company the wonderful company

which makes um uh i think about 65 of the world's almonds and pistachios and uh pomegranates the like palm juice remember remember that stuff like they make that a bunch of other brands um and 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, 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 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 almonds in the central valley could like be enough water for san francisco for a decade um and uh and yet like there's so it's 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 balanced take so really really good long read if you're looking for something about uh um california and history and water wow 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 deserves the time. Indeed. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC2, ISO 27001, GDPR, and HIPAA compliance and monitoring, Vanta takes care of these otherwise incredibly time and

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