April 25, 2014, 6:00 AM —
Google purchased Nest back in January this year for $3.2B and people everywhere are still wondering why. The Nest is a handsome device to be sure, but at around $250 a pop, it’s not exactly a household name. To recover its purchase price, Google would have to sell a lot of Nests...except they won’t have to.
The number of Nests sold is already in the millions. Many people I know have one, and I have one as well. In fact they’ve recently been adapted and are for sale in the UK as well as directly through the Google Play Store. But it’s not like I’m going to go and buy another one anytime soon, which seems like it would be a problem for Google. Before Nest was acquired by Google, it had already solved this conundrum however. A seldom reported business model the Nest has been slowly building is around annual subscriptions to energy providers rather than consumers.
Here’s a little known fact about electricity production, you can’t store it after it’s made. Once you’ve spent the resources to produce an amount of electricity it’s use it or lose it. So if you're an energy company, you better be ramping production up and down inline with demand or you’re essentially burning money. That’s why, contrary to popular belief, energy companies actually want you to use less electricity. If you as a consumer are using less the energy company is spending less on producing energy to meet an estimated demand which must exceed the actual demand, reducing its losses. Energy companies are willing to pay big bucks to improve the efficiency of this supply and demand dynamic but they haven’t had a more accurate way to gather data around the usage patterns of their customers, until now.
Nest has deals with a dozen or so major energy providers in the US already. These energy providers (in some cases) are paying a fee to Nest for each subscriber annually, somewhere in the range of $40 / customer / year. As the number of Nest thermostats in homes increases, the subscriber side of the Nest business is only going to grow. In fact, Nest’s founder Tony Fadell thinks this side of the business will earn more than Nest device sales eventually, and it’s pretty clear why. Energy companies will now have access to a terabytes of usage pattern data include real-time demand information. What’s more, energy companies can communicate grid load data and current energy rates (which fluctuate throughout the day) back to Nest which it can use to intelligently control your thermostat. All of that to ultimately save you, the consumer, money on your energy bill (oh right, and save the utilities millions).
This is a genius alternate business model for the Nest. It’s mind boggling how unsophisticated utility companies are with their customer’s usage data and their production forecasting considering everything that’s available today. Not only will a service like this help the environment but it will reduce costs for everyone involved and improve our energy grid. The possible downfall for Google here of course is that energy companies roll out their own version of these measurement analytics. Given the state of affairs in the sector however, I wouldn’t be too worried about that happening.