Yesterday the big news was Google acquiring Nest Labs, maker of the Nest Thermostat. There are a lot of interpretations of this move. I tend to be a bit more cautious than many on this news, but I am not alone in being a bit disappointed. I wanted to touch on this subject as I feel it hits home on a lot of themes I have been discussing, but I titled this ‘Part 1’ because I know there are people whose opinions I respect who disagree with me, and I imagine we will be having this conversation for some time.
So why do I say I am ‘disappointed’? I am worried that the magic that Nest had begun to create will get lost inside Google. I understand their reasons for selling, and the desire to get help scaling. Unfortunately, I have seen too many such deals fall apart. Being part of a larger company helps with infrastructure but comes at the cost of more bureaucracy, more meetings about meetings, and all sorts of internal politics. I imagine the people at Nest got certain assurances about their independence, but over time those tend to fade, at even companies with the best intentions.
Setting aside post-merger integration concerns, I also think there is an odd trend developing in the Internet world, especially around mobile. More companies perceive the need to move towards vertical integration. I hear this refrain a lot from handset makers who see the sucesss of Apple and assume that they need to own the whole stack in the same way.
There are several problems with this:
1) Apple has the size and experience to be fully integrated. Few other companies have the resources to do both software and hardware. A few large handset makers we can think of, have tried for years to build a ‘software’ business, and generally failed amidst serious culture clashes. Apple has been doing both its entire existence. Moreover, Apple has the scale to design its own processors, again that is something that few other companies can accomplish. So there are limits to vertical integration.
2) Hardware and software are fundmanetally different. Building software is an iterative process, especially on the web. The mantra is to “Fail fast, and fail gracefully.” You can do that when your next product cycle is just a server refresh away. But hardware is less forgiving. You need to get it right the first time, there is no practical way to go back and fix buggy hardware once it is on the market. Building products is hard, which is why there are entire conferences dedicated to that topic.
3) The modular market is underrated. As bearish as I am on PCs, they have had an incredible run and are never going away entirely. That model was built entirely on a whole ecosystem of suppliers, which allowed very rapid iteration and healthy competition. (Healthy for consumer at least.) I would argue that Android is very successful, and one of its best features is the wide diversity of hardware partners.
4) There will always be room for finely-honed specialists like Apple, but there is also a far larger market for general purpose devices. In many parts of the world the iPhone is very much a luxury item, amidst a sea of “good enough” Android phones. If you want to provoke dramatic change in the world, the benefits of a very low cost hardware ecosystem have a lot to offer.
That all being said, I know there are some good reasons to move in the other direction. I will await comments from others before I address those.