Creative Connectivity

Acquire a Tech Visionary for just $3 billion

Today Apple announced their purchase of Beats Electronics for a spectacular $3 billion. It’s left many industry analysts scratching their heads. Although a little shy of the original, anticipated $3.2 billion price tag, it’s surprising how close it is to the amount that Google paid to acquire Nest earlier in the year. So what’s behind the new $3 billion price point?

There are some interesting similarities in the two acquired companies. Both were started for similar reasons – their founders were exasperated with the quality of products which were currently on the market. In the case of Nest, Tony Fadell wanted to design thermostats and other household products which were intuitive and worked, whereas at Beats, Dr Dre was exasperated that expensive music players and smartphones shipped with low quality earbuds which cost less than $1 and failed to reproduce the music. (The Register has a nice opinion piece on whether they succeeded.) Both companies have produced high profile, high end products to address these deficiencies along with very high media profiles for themselves and their founders in industries which have historically had little branding.

A Tale of two Thermostats

Once upon a time there was a start-up in California that thought that the world needed a smarter thermostat. Headed up by some ex-Apple executives, they raised over $80 million for their company and three years later sold it for $3.2 billion. That company is Nest Labs.

Four years before Nest was formed, two experienced technology start-up executives in Cambridge thought that the world would benefit from energy use reduction. Their solution was to design a smart in-home display which showed householders how much energy they were using. They’ve sold almost 1.5 million of these. From that experience they also decided that the world needed a smarter thermostat. Because they had limited funds to complete its development (largely because DECC had constantly delayed the UK smart metering market for their IHDs), they decided to use the crowdfunding site Kickstarter to raise enough to make the first prototypes. They didn’t raise $3.2 billion. They didn’t raise $80 million. They only just scraped together $32,000 before the Kickstarter campaign finished. To put it into perspective, that’s equivalent to the UK retail cost of just 80 of Nest’s smart thermostats. This company is GEO.

I don’t know whether GEO’s smart thermostat – called Cosy, is any better or worse than Nest’s. They both look attractive, competent products from companies that know what they’re doing. GEO’s appears better suited for a Northern European climate, where most energy expenditure goes on heating in winter. Nest’s is probably better for homes with air conditioning as well. But the one hundred thousand times difference between $32k and $3.2 billion that investors are prepared to put into two different smart thermostat companies suggests that certain sectors of the smart thermostat market may be at serious risk of overheating.

Hearables – the new Wearables.

There’s a new bubble in technology – the wristband. Fuelled by Nike’s success, Jawbone’s on the Up, Polar’s in the Loop, Sony’s trying to Force its way into the game, while Fitbit’s aiming to stay as number One. (If you’ve ever wondered how branding executives choose their product names, that’s how.) Analysts are falling over each other to estimate how large the market will be by 2018. They’re wetting themselves at the prospect of smart watches, seeing the wrist as the saviour of the high tech industry now that smartphones have lost their Shine. (Which has nothing to do with the wrist, but that’s another story.) Currently Credit Suisse holds the prize for unwarranted optimism with a prediction of a market value of up to $50 billion for wearables in 2018. I think they’ve all missed the largest potential market for wearables – a category I’m going to call Hearables. The ear is the new wrist.

Analysts making these predictions almost invariably assume the wearable market is intrinsically linked with the smartphone market – currently around a billion units per year and worth over $250bn. To them, wearable seems to be mostly about smart watches and phones which extend small parts of the phone experience to something we wear. They ignore the fact that we still purchase smartphones to make calls. All of those calls send audio to our ears. As well as voice, hundreds of millions of people use their phones for music, as evidenced by the ubiquitous cables trailing from ears. Sound drives the bulk of our technology use and earbuds are the only piece of wearable tech to have gained ubiquity and social acceptance. These devices are about to undergo a revolution in capability, getting rid of their cables and giving them the opportunity to be the standard bearer for wearable technology.

I’m currently writing a new market forecast report for connected consumer wearable technology. It argues that the biggest potential market for connected wearables will not be for devices we put on our wrists, but the ones we put in our ears. By 2018 it suggests that we’ll be spending over $5billion on Hearables. Let me know if you’d like a copy of the report when it’s complete.

Wearables – Novelty or Necessity?

This year at CES – the market defining Consumer Electronics Show in Las Vegas, the general consensus was that 2014 would be the year when wearable technology took off. There were some dissenting views – some thought it would be the year of Home Automation, particularly when Google went and splashed out $3.2billion for Nest, whilst some felt that maybe the Internet of Things would move from being a playground for geeks to a mainstream business. But if you look at what is actually going into production, it looks like wearables was the best bet. That was reinforced at the Mobile World Congress in Barcelona. Phones and hardware were distinctly passé, the excitement was in what you could wear.

The reason the industry is having this debate is that it’s entering new territory. It’s generally agreed that we are in the post-PC era. Whilst PCs and laptops aren’t dead, they’re a declining market. It’s a long time since anything happened that made people go out and buy a new laptop. Most people don’t change their laptops any more. They wait for them to die and them replace them, just like light bulbs and fridges. Smartphones are facing the same fate. It’s no longer cool for most people to have a new smartphone and there is increasingly little to differentiate between them except price. They’ve reached that plateau where the only thing for manufacturers to do is to make them cheaper and try to saturate the market. Even tablets are entering the same territory, with Android tablets turning them from must-have accessory into commodities.

It’s a problem both for big brand names and also for the ODMs and factories which are churning them out. The latter are desperate to find the “next big thing” to the point that they’re courting new startups for small scale production runs which they would not have countenanced a few years ago. Wearables are the top of the list as the next desirable product. The question is whether that reflects reality, or whether the industry is at risk of believing its own PR?

Why Google swapped Motorola for Nest.

You can normally expect CES to set the technobabble agenda for the first few months of any year, but this year, despite the hubbub about Wearable Devices, Home Automation and the Internet of Things, CES played second fiddle to the much bigger announcement of Google paying $3.2bn for Nest. On the face of it, it’s an outrageous amount to pay for a hardware company. The announcement a few weeks later that they were selling off Motorola Mobility for around the same amount made it look like some giant game of cards.

The initial reaction to the Nest acquisition from many commentators was that this just validated their view that CES was heralding the start of the Home Automation market. Long term players, like Control4, saw their share price rocket overnight. Most start-ups in this space have been complaining that their VCs dedicated their next board to persuading the CEO to redesign their business plan in the hope of emulating the Nest sale. On the other side, doomsayers predicted the demise of anyone else in the field as the Mountain View leviathan would take over Home Automation.

Most of what has been written feels like a knee-jerk reaction. What surprised me most was the speed with which Google rushed to say that it would not be using the data from Nest’s thermostats. That announcement came too quickly to be a reaction to media speculation about the data behemoth’s new-found ability to learn even more about users. It made no sense given Nest’s purchase value. It was like a top restaurant hiring Heston Blumenthal and then saying they were only employing him to go out and collect their lunchtime sandwiches. Google is about data. Why pay $3.2bn and then throw the associated data opportunity away? It implies that there’s a lot more behind this acquisition.

Investing in Wireless Standards, or 802.11ad – Mad, Bad and Dangerous to Know?

Investing in a new wireless standard can be an expensive experiment. The investment can be vast, as I’ve described in a previous article on the cost of wireless standards. It’s not unusual for the combined cost of writing and bringing a standard to market to run into billions of dollars. When a standard loses out to a competing one, it’s a heavy loss both for the VCs who have invested in it as well as the companies who have worked on it. The problem is that there’s not been a good way of determining in advance which standards will succeed and which will fail.

Up until this point, the only real yardstick has been the Intel test. That’s the principal that if Intel invests heavily in a wireless standard (think HomeRF, WiMedia or WiMax), then the standard will fail spectacularly. Conversely, if Intel withdraws its development effort from a wireless standard, as they did in the early days of Bluetooth back in 2002, then the standard will be a roaring success. The Intel test isn’t a perfect one – it fails to predict the acceptance of Wi-Fi, but with a track record of four predictions out of five, it’s a lot better than just flipping a coin.

What the industry needs is a new test. I’m going to suggest the Byron test. It’s a more literary approach, suited to the alphabet soup of the 802.11 family of wireless standards and inspired by the popular description of the romantic poet as “mad, bad and dangerous to know”.