Nest may benefit more from Alphabet than any other company in the group, save Google

Google is a search and information company. It was never set up to be a conglomerate. So yesterday’s announcement that a new umbrella company, Alphabet, will contain all the companies in the Google family — including Google itself — isn’t terribly surprising from an organizational or administrative point of view. It will certainly allow Google to focus on its core businesses, which investors will like.

The Alphabet company with (arguably) the second-most brand name recognition is Nest Labs, and Nest may benefit from the restructuring more than any other company in the group, save Google itself. Some very positive changes may happen almost immediately in the way Nest operates on a day-to-day basis.

Agility and independence

The connected home devices company started by Tony Fadell was acquired by Google in 2014 for $3.2 billion. Since then the company has operated under its own name, but has struggled to integrate its connected home and Internet of Things (IoT) stories with Google’s.

The restructuring will allow companies like Nest to operate with more agility and independence, our sources say. This shift will touch many aspects of the companies’ businesses, including controlling the purse strings.

“Nest and the rest gain more freedom to spend money, acquire other companies, etc. without having to try to explain how such costs are benefiting the core ad business when they clearly were not,” said IDC analyst Tom Mainelli in an email to VentureBeat.

“Nest … will still have the deep pockets and other resources of Alphabet,” Mainelli added.

The Berkshire Hathaway model

Observers are already likening Alphabet to the umbrella structure used by Warren Buffett’s Berkshire Hathaway. “Using Berkshire Hathaway again as a concept, we expect the companies to run autonomously,” said Piper Jaffray analyst Gene Munster in an email note to VentureBeat Tuesday.

Above: Nest CEO Tony Fadell. Fadell served as the senior vice president of the iPod division at Apple from 2001-2008, creating the first 18 generations of the iPod. He cofounded Nest Labs in 2010.

Image Credit: AP Photo/Marcio Jose Sanchez

This would mean that Nest would call its own plays, even when choosing who it wants to partner with. “We don’t believe the portfolio companies will be obligated to use Google products if there is a better non-Google solution,” Munster said. “They will have the freedom to do what’s best for their company, which is a good thing.”

The restructuring is meant to give autonomy and agility, but it may also free the companies to communicate their brands and products more clearly to consumers, said Ari Roisman, CEO of the video messaging app maker Glide.

Constellation Research analyst Ray Wang believes Nest’s communications with the outside suffered after its acquisition by Google. “They [Nest] were fairly independent, but in areas around corporate communications they went from very public to very secretive in a fast period.”

IoT stories

The most interesting storyline in the whole affair may be how Nest’s developing connected home and IoT story will be affected by the formation of Alphabet.

Both Nest and Google have their own platforms. Nest has its “Works with Nest” partner program, and it’s developed its own Weave communications protocol for connected home devices. Meanwhile, Google announced at Google I/O a new operating system for the Internet of Things, Brillo.

When Nest announced the second generation of its Nest Protect smoke alarm in June, many expected the company to explain how its products (and its partners’ products) might integrate with Brillo. No such luck. The Nest executive I spoke with at the press event told me the two companies were still trying to work how the various Nest and Google protocols and platforms might work together.

Will Nest still need to align its Internet of Things strategy with Google’s? Will Nest’s IoT platform still need to integrate with Google’s IoT OS, Brillo?

“I suspect that it will,” said IDC’s Mainelli. “While [the restructuring] should give Nest more freedom to do what’s right for it as a standalone company from Google, I think a cooperative IoT strategy is ultimately beneficial to both companies.”

Constellation Research’s Wang believes Google will still see Nest as its go-to partner for the connected home. “I think Google’s inclined to use the Nest IoT platform for the home setting, but in the car they may choose something else. In an office building, Nest may be more appropriate.”

And it’s important to note that Nest Labs cofounder and Tony Fadell has been far from a separatist since Google acquired his company. Google put him in charge of the Google Glass product and the 100 or so Googlers who work on it. Fadell and some other Nest people played a key role in developing Google’s Brillo IoT OS.

Fadell served as the senior vice president of the iPod division at Apple from 2001 to 2008. He’s credited with creating the first 18 generations of the iPod.

Alphabet may empower Nest

Finally, none of the analysts we talked to believe that the formation of Alphabet increases the likelihood of a Nest spin-off. On the contrary, Nest is likely to become a more agile and plain-spoken company now that it exists alongside Google under Alphabet.

“It’s highly unlikely that Nest gets spun off,” said Piper Jaffray’s Munster. “We don’t expect any operating companies to get spun off.”

“People have likened Alphabet to Berkshire Hathaway, and both are in it for the long haul under the same umbrella,” Munster added.