It’s All Change at Nest Except the Business Model

on September 21, 2017
Reading Time: 3 minutes

Nest this week make its biggest ever announcements and introduced its first truly new hardware category since it acquired Dropcam in 2014. Its product line is now extensive and with partner devices thrown into the mix covers much of the addressable smart home market, with all of its own products overhauled in some fashion in the past year. But one thing remains stubbornly unchanged at Nest: its business model. And that may now be the biggest thing holding it back.

An Explosion in Activity After Years of Minor Change

The past year has seen an explosion in activity from Nest after years of relatively minor change and incremental updates. The picture below illustrates what’s happened to Nest’s portfolio of products since its inception, and it’s clear how different 2017 has been:

From its inception in 2011 with the original smart thermostat through the acquisition by Google and acquisition of Dropcam shortly thereafter, Nest created or acquired three main product lines, and from 2014 to 2016 that didn’t change. The Dropcam products adopted Nest branding and got some updates and new variants, but there was no dramatic change. Then, in 2017, the cameras got big updates with much smarter technology, Nest introduced its first cheaper (and less obtrusive) thermostat, and this week it announced its first doorbell product and a home security system. All of this came after the ouster of founder Tony Fadell and although that’s likely in part a coincidence, it’s notable how much more quickly the company has appeared to be moving in the past year.

But the Business Model Remains the Same

However, for all the new products announced over the past year, Nest’s business model remains the same: this is fundamentally an off-the-shelf, pay-upfront, do-it-yourself model, the same as it’s been since the beginning. And as I’ve argued before, that model has severe limitations in terms of its addressable market. Just consider the prices of Nest’s top of the line products:

  • Nest Cam IQ outdoor: $349
  • Nest Cam IQ indoor: $299
  • Nest Secure: starts at $499
  • Nest Smart Thermostat: $249.

Several of these products will need to come in multiples to be useful, so those prices should likely be multiplied to get a real sense of what they’ll cost. That alone will make them cost prohibitive for many customers, but add in the intimidation factor of fiddling with thermostat wiring and the attendant risk of electric shock, drilling through walls to install a security camera, or trying to troubleshoot devices that won’t maintain a reliable connection to WiFi, and you further limit the addressable market.

The (DIY) Smart Home is Stuck

That’s why I’ve been arguing for quite some time now that the biggest thing the smart home market needs to go mainstream is a service model in which professionals install and manage the system and charge a monthly fee which recoups the cost of the hardware rather than charging for it upfront. That lowers the price barrier to entry considerably and means that those not willing or able to install or manage devices themselves can still participate in the smart home.

When new CEO Marwan Fawaz took over from Fadell, I posited that his background at Motorola and other companies which worked through carriers to support a service model might mean that we’d see more of this kind of thing from Nest going forward. But although Nest devices are included in some third party smart home services, Nest still hasn’t created its own, in contrast to players like Comcast, Vivint, AT&T, or the alarm companies. Indeed, at this week’s event it used the self-install model as a major selling point in contrast to having to wait around for a technician to come and spend hours installing a system. That may well be a selling point for the minority who feel comfortable with that model, but I worry that Nest is shutting itself off from a much larger addressable market by restricting itself to it.

A Foundation is in Place for a Managed Service

Nest already has a foundation in place for a services model, as it offers the Nest Aware service for monitoring cameras, and now has a partnership with Moni for 24/7 monitoring around its security system. It’s building a subscription model, but it’s entirely based on either third parties or automated systems today rather than incorporating the human touch in installation and management. Nest even offers to help you find an installer for your new Nest products, but that’s still an arm’s length relationship today and doesn’t offer the brand guarantee that could come from a truly integrated service.

To be sure, there’s still likely quite a bit of growth available for Nest in its current model, by expanding it to new markets and now expanding the line of products it sells. For now, that may be enough to sustain its business for the next couple of years, but there’s a much bigger opportunity out there if it takes many of the components it already has in place and turns them into a managed service.