Google: The new GE: Google, everywhere

AT GOOGLE they call it the toothbrush test. Shortly after returning to being the firm’s chief executive in 2011, Larry Page said he wanted it to develop more services that everyone would use at least twice a day, like a toothbrush. Its search engine and its Android operating system for mobile devices pass that test. Now, with a string of recent acquisitions, Google seems to be planning to become as big in hardware as it is in software, developing “toothbrush” products in a variety of areas from robots to cars to domestic-heating controls.

Its latest purchase is Nest Labs, a maker of sophisticated thermostats and smoke detectors: on January 13th Google said it would pay $3.2 billion in cash for the firm. Google’s biggest move into hardware so far is its $12.5 billion bid for Motorola Mobility, a handset-maker, in 2011. In recent months it has been mopping up robotics firms (see table), most notably Boston Dynamics, which makes two- and four-legged machines with names like BigDog and Cheetah that can walk and run. Google’s in-house engineers have also been busy working on driverless cars and wearable gadgets such as Google Glass.

Nest takes Google into the home-appliance business, which is how another, much older American conglomerate got started. General Electric (GE) produced its first electric fans in the 1890s and then went on to develop a full line of domestic heating and cooking devices in 1907, before expanding into the industrial and financial behemoth that is still going strong today.

The common factor shared by GE’s early products was electricity, something businesses were then just learning to exploit. With Google’s collection of hardware businesses, the common factor is data: gathering and crunching them, to make physical devices more intelligent.

Even so, the question is whether Google can knit the diverse businesses it is developing and acquiring into an even more profitable engineering colossus—or whether it is in danger of squandering billions. Concern that the firm could make overpriced acquisitions has grown along with the size of its cash pile, now around $57 billion. Eyebrows were raised this week when the price for Nest was revealed. Morgan Stanley, a bank, reckons it represents ten times Nest’s estimated annual revenue. (Google’s executive chairman, Eric Schmidt, is a non-executive director of The Economist Group.)

Why fork out so much for a startup that makes such banal things as thermostats? Paul Saffo of Discern Analytics, a research firm, argues that Google is already adept at profiting from the data people generate in the form of search queries, e-mails and other things they enter into computers. It has been sucking in data from smartphones and tablet computers thanks to the success of Android, and apps such as Google Maps. To keep growing, and thus to justify its shares’ lofty price-earnings ratio of 33, it must find ever more devices to feed its hunger for data.

Packed with sensors and software that can, say, detect that the house is empty and turn down the heating, Nest’s connected thermostats generate plenty of data, which the firm captures. Tony Fadell, Nest’s boss, has often talked about how Nest is well-positioned to profit from “the internet of things”—a world in which all kinds of devices use a combination of software, sensors and wireless connectivity to talk to their owners and one another.

Other big technology firms are also joining the battle to dominate the connected home. This month Samsung announced a new smart-home computing platform that will let people control washing machines, televisions and other devices it makes from a single app. Microsoft, Apple and Amazon were also tipped to take a lead there, but Google was until now seen as something of a laggard. “I don’t think Google realised how fast the internet of things would develop,” says Tim Bajarin of Creative Strategies, a consultancy.

Buying Nest will allow it to leapfrog much of the opposition. It also brings Google some stellar talent. Mr Fadell, who led the team that created the iPod while at Apple, has a knack for breathing new life into stale products. His skills and those of fellow Apple alumni at Nest could be helpful in other Google hardware businesses, such as Motorola Mobility.

Google has said little about its plans for its new robotics businesses. But it is likely to do what it did with driverless cars: take a technology financed by military contracts and adapt it for the consumer market. In future, personal Googlebots could buzz around the house, talking constantly to a Nest home-automation platform.

The challenge for Mr Page will be to ensure that these new businesses make the most of Google’s impressive infrastructure without being stifled by the bureaucracy of an organisation that now has 46,000 employees. Google has had to overcome sclerosis before. Soon after returning as boss, Mr Page axed various projects and streamlined the management.

Nest is being allowed to keep its separate identity and offices, with Mr Fadell reporting directly to Mr Page. Google has also protected its in-house hardware projects, such as Google Glass and self-driving cars, from succumbing to corporate inertia by nurturing them in its secretive Google X development lab. It has also given its most important projects high-profile bosses with the clout to champion them internally. The new head of Google’s robotics business is Andy Rubin, who led the successful development of Android.

Such tactics are good ways to avoid the pitfalls of conglomeration. But to ensure success, Google will need to avoid another misstep. Its chequered record on data-privacy issues means that Nest and other divisions will be subject to intense scrutiny by privacy activists and regulators. Provided it can retain the confidence of its users on this, Google should be able to find plenty of new opportunities in both software and hardware that pass the toothbrush test and keep a bright smile on its shareholders’ faces.

Article source: http://www.economist.com/news/business/21594259-string-deals-internet-giant-has-positioned-itself-become-big-inventor-and?fsrc=rss

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