Alphabet Reveals Nest Losses and Its Own Smart Home Commitment

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2Q 2018 | IN-5129

Nest, the company that has revolutionized the market for smart thermostats, suffered losses of around US$621 million in 2017. The losses, which could be derived from reporting changes by Nest’s parent company Alphabet, are a key financial indication of the company’s performance and they reflect the cost of an ongoing strategy to expand Nest’s smart home offerings. This expansion aims not only to build on the appeal of legacy Nest products but also to tie them more closely to Google technology. It is a move that matches plays from key smart home rival Amazon, and the results emphasize the scale of ongoing investment into the smart home market.

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Alphabet’s First Quarter Reveals Nest’s Performance

NEWS


Nest, the company that has revolutionized the market for smart thermostats, suffered losses of around US$621 million in 2017. The losses, which could be derived from reporting changes by Nest’s parent company Alphabet, are a key financial indication of the company’s performance and they reflect the cost of an ongoing strategy to expand Nest’s smart home offerings. This expansion aims not only to build on the appeal of legacy Nest products but also to tie them more closely to Google technology. It is a move that matches plays from key smart home rival Amazon, and the results emphasize the scale of ongoing investment into the smart home market.

Restructuring Reveals Financials

IMPACT


Although Alphabet did not break out Nest’s results, a shift in control and subsequent reporting of Nest within Alphabet provided an indication of the value of the business. Nest was moved out of Alphabet’s “Other Bets” reporting and back into Google at the end of last year.

In its first quarter reporting, Alphabet recast quarterly earnings results for the previous year, restating Nest’s impact on the business as part of Google’s business after it was removed from the “Other Bets” section. A comparison of the two sets of reported figures shows Nest made about US$726 million in revenue but contributed a US$621 million loss throughout the year. In addition, Nest seems to have booked revenues of US$278 million in the fourth quarter, just 38% of its yearly total in a quarter.

Nest Losses Point to the Commitment and Restructuring to the Direction

RECOMMENDATIONS


Nest’s revenues have long been veiled. For the past three years, Nest operated as a stand-alone business within Alphabet, which meant that its financials were buried together with other Alphabet operations, including its life sciences unit Verily and Google Fiber.

The losses and investment sustained at Nest during 2017 was in no small part driven by a growing ambition to quickly expand from its long-standing smart thermostat base to a family of various devices. These devices offer the company a way to build on the adoption of its core thermostat device while pushing the company into system-level smart home provision and support. It also places Nest at the heart of smart home control where insights about home use can be leveraged as a revenue stream by Nest and from third party partners.

Nest’s recent slew of new devices has been impressive. In July 2017, Nest rolled out the Nest Cam IQ, an upgraded version of its existing outdoor wireless video camera. In August 2017, Nest launched its Nest Thermostat E, a more entry-level version of its original and still core device. In September 2017, Nest launched its Nest Guard alarm, keypad, motion sensor, Nest Detect door/window contact sensor, and the Nest Tag Key fob. These  combine to deliver the Nest Secure smart home security system. The Nest Hello video doorbell was also announced at the same time; we reviewed these new items in detail inSeptember 2017. The product launches continued into 2018 with the recent launch of the Nest Temperature Sensor. The Nest Temperature Sensor expands Nest’s smart thermostat capabilities to bring more detailed, room-by-room network sensing to its core device. With its return to Google, Nest can now develop a similar approach to voice control within the home.

Nest was pulled back into Google so that Nest devices could make better use of the AI features and Google Assistant voice control platform that were previously the primary domain of the Google hardware unit (which includes the Pixel 2 smartphone and Google Home devices). With Nest part of the hardware group, the potential for Integrating Google Assistant into Nest devices could expand the reach and appeal of the voice assistant throughout the home as well as propel Nest and Google smart home products ahead of their primary competitors—most notably, Amazon.

While Google is underwriting the expansion of Nest’s offerings, revenues at Nest appear to have more than doubled since 2015. By comparison, Amazon, Google’s key competitor in the increasingly vital smart home voice control platform market—didn’t start fully shipping its first smart home device (the Echo) until June 2015. Since then, Amazon has launched seven more Echo devices, with shipments reaching nearly 30 million. In February Nest CEO Marwan Fawaz said that Nest has shipped just over 11 million devices, which are sold at notably higher prices than Amazon Echo units, since launching in 2011.

Amazon continues to dominate the voice control front-end platform market with Alexa on a range of Echo devices. Like Nest, Amazon is investing in building up a wider range of smart home devices to expand its offerings and potentially integrate with Alexa. In the past six months alone, Amazon has bought the smart doorbell and smart camera companies Ring and Blink. In addition, the Amazon Echo Plus launched in September 2017, shipping with embedded ZigBee connectivity that enables the device to be the gateway for smart home devices such as the contact and motion sensor formats that Nest is now offering. With the connectivity in the latest generation of Nest Thermostats and with its new Nest Guard device, Nest is also starting to provide similar gateway functionality within its product mix.

Growth at Nest may have stumbled since it was acquired for US$3.2 billion by Google in 2014, but the scope of the investment going into the company, now combined with the recent slew of product and service announcements, suggest the company is taking an increasingly central role in Google’s hardware and services strategy. With Alphabet’s deep pockets supporting the business, the smart home market should be on the verge of an expansion not only in Nest offerings, but also in device formats with integrated voice control across the smart home market.

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