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It's crunch time for Nest

NestNestThe Nest thermostat.

It was another week of big changes for Nest, the smart appliance company owned by Google’s parent company Alphabet.

After losing its CEO this summer, Nest is now losing its software staff to Google, according to Fortune’s Leena Rao and Dan Primack. A source close to Nest confirmed the change to Business Insider.

The Nest software engineers will now work on Google’s internet of things (IoT) platform under Hiroshi Lockheimer, a top Google executive who works on Android. As my colleague Matt Weinberger wrote when the news broke, Nest’s loss is Android’s gain as the operating system evolves beyond smartphones and tablets and into other connected devices like appliances and even laptops.

It’s also an opportunity for Nest, which can now focus all its efforts on growing its hardware business. But Nest is also running out of time to prove it can pull it off. The company hasn’t released a major new product category since Google bought Nest for $3.2 billion in 2014. (Nest bought the startup Dropcam and released its own Nest-branded version of the device. It also released an outdoor version earlier this year. But there still haven’t been any new product categories wholly cooked up by Nest.)

A source familiar with Nest’s plans says the company won’t break into new product categories until 2017, and it’s looking at home security as a potential area to explore. There have also been reports that Nest is working on a “hub” that ties all your smart home appliances together, but it’s unclear the status of that project now that Google is working on its own smart home platform and already makes a similar device called OnHub. The upcoming Google Home speaker will also be able to control connected appliances.

The decision to transfer Nest’s software team to Google could turn out to be a blessing for Nest though. It will reduce overhead costs for the company, which are reported separately from Google’s core business, and allow Nest the freedom to start shipping new hardware next year. It gives Nest the potential to turn itself into a billion-dollar business on its own based on the strength of its hardware products alone, our Nest source says.

That’s one optimistic way to look at it.

Another view is that if Nest can’t prove it can grow its hardware business and ship exciting new products, then Alphabet may consider offloading Nest like it did with Motorola a few years after it bought that company. Alphabet appears to be going through a lot of house cleaning a year after its formation, with big changes happening to its robotics division, its smartphone ambitions, Google X, and much more. Dieter Bohn of The Verge has a good rundown of all of Alphabet/Google’s recent shakeups to key parts of its business.

For now, Nest is safe. Our source says there were no layoffs as part of the changes, and the Nest team is feeling optimistic going into next year.

But given how Alphabet is taking a closer look at how its various divisions are performing, the pressure is on for Nest to finally prove itself.

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