It’s been a tough two weeks for Nest, the smart home company acquired by Alphabet Inc (GOOG,GOOGL) in 2014.
Staff are jumping ship and Alphabet is putting on the pressure to release new products needed to meet sales goals.
Amidst all of the chaos at Nest, Greg Duffy, co-founder of Dropcam, which the company purchased in 2014, has gone on record describing the sale as a “grave mistake.” Then, a few days later, Nest shut down Revolv, another smart home startup it had purchased.
This move effectively bricked all Revolv hubs in circulation, leaving the $300 devices useless hunks of plastic and earned Nest a public relations black eye on top of its internal challenges.
What the Heck Is Going on at Nest?
Let’s start with Dropcam — that’s where the first public hints of Nest’s troubles surfaced.
At the end of March, The Information posted a deep dive into Nest and its CEO Tony Fadell. Much of the piece focused on Dropcam, in light of a series of public remarks made by its co-founder that have been highly critical of Fadell.
Dropcam was experiencing strong sales growth and had new home security sensors in its product pipeline when it was acquired by Nest for $555 million. Nest immediately cancelled Dropcam’s home security project in favor of its own (which has yet to materialize) and half of the 100 Dropcam employees have quit since the acquisition due to an apparent culture clash. Dropcam’s co-founder also quit, first attempting to oust Fadell by pitching himself as a replacement to Alphabet CEO Larry Page.
Also central to the piece in The Information is Alphabet’s growing impatience with Nest’s financial performance. The company hasn’t released any new products — just updates — since being acquired by GOOGL for $3.2 billion, and sales since then have fallen short of expectations. There are reports Alphabet is putting pressure on Nest to finally release its smart home security system by this fall, with Fadell admitting that Alphabet expects to hold him to the numbers in business plan projections going forward.
Re/Code goes further, saying that with $340 million in sales for 2015, “Nest is underperforming, and its future at Google is at risk.” With a three-year operating budget tied to a vesting schedule designed to retain key engineers and executives set to expire in 2016, the pressure on Nest seems likely to get worse before it gets better.
Similarly, 9To5 Google reported on a Reddit thread where someone claiming to be a Nest engineer posted that the company is on a “deathwatch” thanks to poor sales and lack of innovation, calling out Fadell’s leadership as central to the problems.
Finally, as if all the the internal drama wasn’t enough, Nest now finds itself in the middle of a major public relations disaster. The company bought smart home startup Revolv in 2014, apparently interested more in its engineers than its smart hub product. The announcement “We’re shutting down Revolv” effective May 15 so that resources can instead be allocated to the Works with Nest platform landed with a thud. People who bought the $300 hub learned it will be good only as a paperweight going forward.
As a result of the backlash, a Nest spokesperson told The Verge the company is now considering compensation on a “case-by-case” basis, but the damage runs deeper than angering Revolv customers.
Wired subsequently ran the headline “Nest’s Hub Shutdown Proves Your Crazy Buying Into the Internet of Things,” pointing out the move shows how reliant smart devices are on a company’s ongoing support. If Nest decided tomorrow to re-allocate money from its Protect web service to focus on a new priority, then its $100 smoke detectors could instantly become junk as well.
That vulnerability to a company’s whims and objectives sends a message to consumers that could undermine their willingness to buy into Nest’s platform at exactly the wrong time.
Where does all this leave Nest?
There’s no denying the shine is off the smart home company, which rose to fame with the slickly engineered Nest Learning Thermostat. Alphabet is clearly growing impatient for its multi-billion dollar investment to pay off, while Nest’s own acquisitions are creating cultural and legacy product support issues. At the same time, the airing of Nest’s dirty laundry is doing nothing to inspire consumers to invest in smart home gear — if the poster child for this stuff is clearly struggling, what does that mean for the future of the smart home?
Alphabet is unlikely to give up on Nest or smart home integration, especially with pressure from Apple Inc.’s (AAPL) HomeKit and the surprise success of Amazon.com, Inc.’s (AMZN) Echo.
However, with Nest’s troubles being aired in an increasingly public manner, the time may be coming where Alphabet decides a shake-up is needed to get its smart home division back on track.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
