Nest: The Missed Opportunity.

I once applied for a job at Nest.

It was for Head of Energy Partnerships and the role was to sell retail electricity providers on the benefits of subsidizing thermostats for retail electricity customers.

Unlike providing subsidized thermostats to utilities for their customers — an easier proposition because of the direct relationship between you, your energy usage and your utility bill — it would have been tougher to sell to retail electricity providers because the value of the Nest directly counters the premise of the retail provider business model: getting you to use more electricity even as you buy the electricity at a cheaper price*.

It was a difficult proposition and has proven tougher to implement than Nest expected.

In hindsight the success of such a role and that business model would have further damaged Nest’s ability to truly become a platform in a connected home market where everyone, and I mean everyone, sells a product.

Nest went from being a company that had an edge over other connected home competitors to one that is now voice controlled from a product from one of their unexpected competitors: Amazon.

Voice as an interface.

So how did Nest drop the ball in a market that is supposed to show an annual growth rate of 25.3% resulting in a market volume of $32Bn by 2021 in the US alone?

Two big reasons.

A: Product Not Platform

So what was the mistake in the direction Nest took in building products for the home? That was the mistake: purely building products for the home.

It started with the thermostat, and the smoke detector and further evidenced by their acquisition of another device company, Dropcam. Tony Fadell said it himself in his interview with Jessica Lessin’s The Information.

“[He] stressed that building products for the home was different than building consumer gadgets at Apple, where the company needed to release a new version once a year to stay ahead of the competition.
“It’s not a consumer driven personal device. This is something you’re going to put on your wall. It’s going to sit there for ten to 12 years,” he said. “We’re so far ahead of the competition, it doesn’t require that.”

Let’s ignore the hubris — ‘we’re so far ahead of the competition’ should go down as one of the famous last words of a product visionary — because there is no doubt that Tony Fadell is a product visionary. He’d been involved in the iPod, still one of the most industry shifting products of our modern technological times, and of course the beautiful, in terms of form and function, Nest thermostat itself.

But he was focused on building hardware his strength — and had failed to learn the lessons of the platform approach that the iPod he’d helped to build had — I hesitate to say — pioneered. Because the iPod was truly just a hub for the true platform: iTunes .Taking a retail product strategy — sell more of a product or more products — is counter to what is required to build a platform. Where Fadell was obsessed with building a better product, Amazon decided to get into market with a platform masquerading as a product.

From Platform Revolution (Parker, Alstyne and Choudary):

A platform must maximize the value of its whole ecosystem. To do this, it considers three factors: the value of individual interactions as perceived by participants, the volume of those interactions as transacted on the platform and the value users create for other users, i.e. network effects.

While chasing growth Nest missed the chance of being the hub of a movement towards a central control system for all the connected devices in the home. The company has lost ground especially as there is now a glut of competitors in this space. The image below is of startups that are well known, I’ve personally spoken to at least 5 other companies steadily building internet of things products for the connected home. Problem is, the consumer only has so much money to spend and this leads to the 2nd issue for Nest — and all its product focused competitors.

B: Limits to Growth

Nest, as a product retailer, was only going to grow so much. In systems thinking there is a phrase that suggests that ‘There will always be limits to growth, they can be self imposed or system imposed’.

Nest placed a limit on its own growth by focusing on products — a customer will only truly buy a finite number of Thermostats for her home regardless of the number of generations of the thermostat that a company releases — instead of focusing on the interactions within products — consumers will use electricity every day and pay for that electricity either at time of use or based on a predetermined price, many interactions.

The limits to growth that occur as a result of the dynamic interplay between a company, the product it puts into the market and the market itself can be modeled — and I am sure Nest modeled this. What is much harder to model, and where the true limit to growth for Nest was, is what the system as a whole will do: what are your competitors building that, while on the face of it might be adjacent to your product, will stifle your ability to grow to the extent your models predicted. This tends to be the case when a company takes a product view of the world.

I wanted the Nest job so much that I actually emailed Tony Fadell some recommendations because I viewed the company as a platform not a product. The crux of what I wrote was

“I have a firm belief that the consumer energy management future of the utility industry will be one that is well designed, continuously improving and customized to the individual consumer’s needs…The Future Utility will be asset light (a control hub), data driven and will delight the consumer. Nest is already becoming that Future Utility…
A package that includes the Nest Thermostat (energy usage and management), Dropcam and maybe a August lock type company (to provide the ‘context’ of the consumers life beyond the energy) as a suite of services that enables us to take over customer service, billing and payment customized to each customer. Nest essentially ‘takes over’ ownership of the customer interactions.”

Tony Fadell was gracious enough to respond afterwards but the product approach continued. So we find ourselves at this point about a year later. Nest is more irrelevant than it’s ever been. Google’s Home Device is currently in the market and, no surprises, it is a platform masquerading as a product. That’s the approach you take when all your other businesses are platforms. I’m surprised Google did not adopt this strategy for Nest.

How Does Nest Continue To Compete?

For Nest or any startup trying to get into the connected home space to win will require a different look at how to build a platform and this approach, again borrowing from the strategy laid out in the Platform Revolution, would require

  1. Building a nodal network: Each individual Nest user is currently a discrete point that is neither connected nor engaged with other users/points i.e. other Nest owners. The company would need to connect all these points to build a network.
  2. providing value to ecosystem: beyond selling you products and providing after sales support, Nest customers have little interaction with Nest as a company or platform; some approaches to delivering value to the ecosystem would be to use the data that Nest currently has to replicate what Opower was doing by providing customers visibility into how much energy am I consuming or generating from my solar panels and at what price, all conveyed to other players on the platform
  3. increasing the volume of interactions: This can either be done by providing other products (e.g. working with Sonos) access to the network of customers that’s been built or by increasing the volume of information being provided on the platform (e.g. adding price signals to what is currently just a kWh used signal).
  • Ramping up network effects: are the interactions on the platform increasing in value to the individual participants on the platform.

The winner in this space will be a company that can combine the platform and data driven approach with the retail future of the electricity industry to delight customers.

From Platform Revolution

No surprises, I didn’t get the Nest role. I didn’t even get an interview. But I truly believe that the future of the utility industry does not even have to start with an energy platform, there is a convergence happening between the built environment/connected home and distributed energy in our homes. And platforms will be key to that convergence.

The image above is a Smart Remote currently on Kickstarter from Seven Hugs. The claim is that the product integrates with 25,000 products and the point is clear: enable all the products that make a home connected because she who owns the customer through a platform owns and captures the value. The asset light approach is a software approach. I guess that’s why Tony Fadell had to leave as Nest is no longer just a product company, the type of company he knows how to build, Nest has to become a platform play.

That being said, Nest is still right in the game as it takes the ‘Thread (open network consortium) approach’ but they’ve lost the initiative. The strategy now is clear and it all boils down to execution against an internal competitor (Google Home) and a slow and lumbering utility industry trying to figure things out. The focus on hiring more software and machine learning/data engineers suggests the platform future might still be in play. Watch this space…

*Not all retail electricity providers take this approach.

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