Why Google Spent $3.2 Billion On Nest

Google announced Monday that it will be shelling out a whopping $3.2 billion in cash for Nest Labs, Inc.

Nest sells redesigned version of commonly overlooked household appliances like smoke alarms and thermostats. Its products intuitively save energy and can be controlled on-the-go via a mobile app.

“We’re thrilled to join Google,” Tony Fadell, Nest’s CEO, said in a statement. “With their support, Nest will be even better placed to build simple, thoughtful devices that make life easier at home, and that have a positive impact on the world.”

The company will continue to operate as a separate entity under Fadell’s leadership once the deal is finalized in the coming months.

Why It Matters For Google

Nest’s motives are straightforward: The deal is profitable and offers a huge growth opportunity for a small business. But there’s a lot of speculation as to why Google wants to acquire Nest and how it will use the startup.

The acquisition marks Google’s latest attempt to offer “connected home” products, which haven’t done well for the company in the past, according to CNN.

First there was Android@Home, a platform similar to Nest’s that allowed users to control appliances via their Android devices. Then the Nexus Q streaming media device never even reached shelves when it was scheduled in 2012. More recently, there was Chromecast for streaming music and videos on a television.

Google clearly hasn’t given up on the connected-home industry, still seeing it as a potentially lucrative niche to be in. And experts at last week’s Consumer Electronics Show agreed, estimating the market will hit $10 billion this year and $44 billion by 2017.

The Connected Experience: An Advertiser’s Dream

Besides the potential of the connected home, Nest offers Google some important information.

Google already knows what users do online, and Nest has the power to know what users do when they’re not at their computers. A combination of the two has nearly endless applications, especially in advertising. Such specific user data could be used to predict our behaviors, both online and offline, and sell us on products and services.

Matt Rogers, Nest’s founder and vice president of engineering, says this won’t happen. He said in a blog post that Nest’s current privacy policy will stay in place after the acquisition. “Our privacy policy clearly limits the use of customer information to providing and improving Nest’s products and services,” he wrote.

However, it’s possible that Google will use anonymized user data from Nest, which would still be immensely helpful.

Overall, it’s likely Google will benefit from the acquisition both directly – acquiring a business set to become successful in the near future – and indirectly – offering new insight to advertisers and creating an even more user-specific ad experience.