Thrown from the nest: Nest Lab’s Challenges and Opportunities
After it’s blockbuster $3.2BN acquisition by Google in January 2014, Nest Labs has struggled to meet its hardware revenue targets, but is there a bigger opportunity in the company’s data- enabled business model?
What do a doorbell, a thermostat, an oven, and a video camera all have in common? Each of these seemingly unrelated household items are all a part of Nest Labs’ pursuit to unite the ‘connected home’ through digital transformation. The company, started in 2010 by iconic Apple iPod designer Tony Fadell, was founded in pursuit of shaping the Smart Home market that is projected to be worth over $120BN by 2022. [1]
Nest Labs’ business model creates and captures value for multiple groups of stakeholders
Best known for its iconic thermostat, Nest has built a successful two sided platform business model that uses data to create and capture value for three groups of stakeholders: utility companies, consumers, and shareholders of the company itself.
- Consumers: Nest creates value first and foremost for its consumers through savings in heating and cooling the home. It does this by learning the daily habits of the owner, ensuring that a room is at the desired temperature when someone is home, but adjusting temperature when unoccupied, thereby reducing the amount of energy consumed. In addition to lowering energy usage, Nest Thermostat also connects to energy companies’ networks to optimize energy consumed at off-peak hours throughout the day when electricity rates are lower than at peak hours. [2]
- Utility Companies: Critically, Nest provides substantial value to energy companies in the form of data. Providing instantaneous, aggregated energy usage across thousands of households enables utility companies to improve their forecasts and therefore cost efficiency. [3]
- Company: Lastly, Nest creates value for itself and its investors through selling its Smart Home consumer products, namely its thermostat, which is between two and three times as expensive as a traditional thermostat [4]. It also has established a secondary revenue stream from selling the energy consumption data that it is able to aggregate across its devices.
Underwhelming product revenues have missed acquisition sales targets
Despite the fact that smart meters (the category in which Nest Thermostat is included) held the largest share of the Smart Home market in 2015 [5], and despite support from city governments who have gone so far as to enact laws that require the installation of internet connected thermostats in any new residential construction [6], Nest Labs has struggled to meet the hardware sales targets set by parent company Google as a part of its $3.2BN acquisition of Nest in 2014 [7]. Analysts and Google insiders have criticized the company for not producing more revenue-generating hardware products since the acquisition and as such, have applied pressure to produce another blockbuster product innovation.
Untapped opportunity to shift primary focus from hardware sales to data solutions
Rather than following on analyst and holding company expectations to sell more products, I would argue that there is another path for Nest Labs to leverage the strengths of its current business model and create value through digital transformation. Instead of doubling down on hardware and trying to win market share in a currently fragmented product market (an area where parent company Google has had a track record that is inconsistent at best [8]), the company could instead focus on data collection and becoming the data aggregator for the connected home.
Nest labs is well positioned to take on this role and create data-driven value for consumers and suppliers alike. With its own branded Thermostat, Smoke Detector, and Video Camera products –combined with its dozens of “works with Nest” partner products [9], Nest Labs has a head start on most competitors in the industry.
Product partnerships and data aggregation as the pathway to maximizing value creation through digital transformation
Focusing primarily on partnerships and leveraging parent company Google’s strength of data collection and trend analysis, Nest Labs has the potential to expand beyond solely providing utility companies with user data on energy consumption. Revenue generating data and analytics opportunities from the Nest platform are near limitless. Examples for how Nest could commercialize the data that it would connect from its network of “works with Nest” in-home devices include:
- Selling GE data on frequency and types of repairs when a refrigerator or oven breaks down
- Aggregating and sharing burglary data with local police through its Nest Cam and Yale Linus™ lock
- Commercializing data on consumer water consumption through its partnerships with Heatworks, Smart Garden Hub, and Rachio smart sprinkler products
In prioritizing partnerships over products and focusing on growing the size of the “Works with Nest” network, the company will be able to disproportionately grow its network effect: increasing the number of product manufacturers who want to work with Nest Labs, which will in turn make the Nest platform more attractive to more consumers, increasing the value of the data that Nest Labs is able to provide back to product manufacturers. This is the true opportunity for Nest to unlock growth through digital transformation.
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- “M2 PressWire.” Smart Home Market worth. N.p., n.d. Web. <http://www.marketsandmarkets.com/PressReleases/global-smart-homes-market.asp>.
- Iansiti, Marco, and Karim R. Lakhani. “Digital Ubiquity: How Connections, Sensors, and Data Are Revolutionizing Business.” Harvard Business Review, n.d. Web.
- ibid
- ibid
- “M2 PressWire.” Smart Home Market worth. N.p., n.d. Web. <http://www.marketsandmarkets.com/PressReleases/global-smart-homes-market.asp>.
- Calnan, Christopher. “Building a New Home? Make Sure the Thermostat Connects to the Internet.” Austin Business Journal. N.p., n.d. Web.
- “M2 PressWire.” Smart Home Market worth. N.p., n.d. Web. <http://www.marketsandmarkets.com/PressReleases/global-smart-homes-market.asp>.
- Wakabayashi, Daisuke, and Nick Wingfield. “Google, Lagging Amazon, Races Across the Threshold Into the Home.” The New York Times. The New York Times, 03 Oct. 2016. Web.
- “Home.” Nest. Nest Labs, Inc., n.d. Web. 14 Nov. 2016. <https://nest.com/>.
Original Post: Friday, November 18 | Updated with correct sources: Saturday, November 19
While I agree that Nest has the potential to create value for energy companies through its data, the current business model for Investor Owned Utilities (IOUs), which maintain ~68% market share, will rapidly need to evolve to make use of this data.[1] At a high level, the business model for these companies usually makes money by either selling more power at lower rates or by selling less power, but at higher rates (called “decoupling”) to avoid reduced revenue. Under either version, a platform like Nest which enhances grid efficiency will reduce revenue potential for IOUs, and I’m wondering how welcoming IOUs have been at partnering with Nest (or similar platforms).[2] With that being said, utility companies need to innovate and figure out how to use this data to manage the grid in an efficient and sustainable manner. I’m also hoping initiatives like “Works With Nest” helps the unify the currently state and regionally focused electric grid on a national level. As we move into a future with renewable energy created through distributed generation, such measures could help reallocate excess energy from one region to another (e.g., Mojave Desert to Southern California) without needing to leverage fossil fuel baseload plants to produce energy when renewables cannot.
[1] Jeff Tarbert, “Public Power’s Business Model: A Primer,” American Public Power Association, [http://www.publicpower.org/files/Media/PP Business Model-Tarbert.pdf], accessed November 19, 2016, p. 6.
[2] Katie Fehrenbacher, “Nest Shutting Data Service MyEnergy,” Fortune Online, March 1, 2016, [http://fortune.com/2016/03/01/nest-shuttering-data-service-myenergy/], accessed November 19, 2016.
Very interesting article Stephen! While I was clear on the value Nest brought to its consumers and the company itself, I was not aware that Nest provided data to utility companies. I wonder if utility companies view Nest as a net-positive, considering that Nest enables thousands of consumers to use less energy, and therefore pay less to utility companies.
I agree that further commercializing household data is definitely an interesting area for Nest to pursue, however consumer appeal still needs to be taken into account. Nest’s data relies on household adoption of Nest products, and this adoption is not guaranteed. A competitor that focuses on product differentiation could easily come in and usurp Nest’s lead in the smart home space. Therefore, I believe that Nest needs to be simultaneously a product leader, staying at the forefront of digital trends, and commercialize its vast quantities of data.
Nest should also take into account privacy concerns, which could become an issue down the road. One example of a concern could be thieves gathering energy usage data to know when people are in their homes, and plan burglaries during times when energy is not in use.
Stephen I really like your idea of Nest moving in to the big data space; however I agree with Ana that there are big concerns around privacy that would need to be addressed.
The other issue is that in order to collect the data, you need to have the hardware installed. I’m actually pretty sceptical about how much take up there will be from consumers on energy efficiency products like Nest. They say it saves around $131-$145 a year [1] …this is not a significant amount of money. How many people are really going to go out of their way to buy something that saves them $12/month?
Instead perhaps they should focus on a B2B model, and target large energy consumers like retail stores or factories. I imagine these types of customers would have a lot more interest in both the energy savings and the information that they can get from Nest.
[1] https://nest.com/support/article/How-does-the-Nest-Thermostat-savings-calculator-work
I like the idea of Nest focusing on data aggregation. To further your point, I think it would be really interesting for Nest to have a personal energy consumption feature of their app similar to a personal finances app. While many people like to think that they are environmentally responsible with their energy consumption, it’s not exactly the easiest thing to track until you have to pay your bill every month. A Nest personal energy consumption app would give consumers the ability to track their daily energy consumption and hopefully make people a little more environmentally responsible.
Thanks Stephen for this interesting article!
I agree with you and the comments above that focusing only on this thermostat can’t be an option for Nest: too expensive compared to savings, too niche. However, Nest has an enormous advantage in the overall smart home market that it should leverage, not only through partnerships, but also through new products development.
Hi Stephen, thanks for the post, it’s a great update on what’s happening at Nest. I remember when the Nest acquisition was announced, and I like many others were very surprised at the price tag. It meant that google seemed to see some huge synergies in the deal that we didn’t see. Based on your post, I must say I’m still a skeptic. While there are potentially some incremental revenue opportunities in data aggregation and analysis, the value of that data to the customers you mention seems marginal. I believe GE would get similar data from product returns, for example. On the product side, I also agree with you that the growth opportunities are limited especially given that fact that savings are marginal. To me, the main opportunity for energy efficiency in residential homes lies in better designs of homes — e.g., high efficiency windows, better insulation, designs to leverage natural heating and cooling resources — and higher efficiency heating and cooling equipment and LED lighting. I believe all of these technologies are proven, and with some upfront investment, can move the needle in residential energy efficiency.