Nest

Acquired brings it all back home—to the smart home that is—with Google’s 2014 acquisition of Nest for $3.2B. From Nest cofounder Tony Fadell’s first job at General Magic (alongside future Android founder Andy Rubin) to his days as “father of the iPod” under Steve Jobs at Apple, the Silicon Valley history runs deep with this one. But did that make the acquisition a good move for Google in the coming battle with Amazon’s “Lady A” for control over consumers’ homes? We dive in! Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Links:Tony Fadell in the Academy of Achievement http://www.achievement.org/achiever/tony-fadell/Steve Jobs deleting Tony Fadell from his Favorites https://www.youtube.com/watch?v=0wQ7oL9pIIUCarve Outs: Ben: Do by Friday podcast http://dobyfriday.comDavid: A Kingdom from Dust https://story.californiasunday.com/resnick-a-kingdom-from-dust By Mark Arax in The California Sunday Magazine

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  The color really does have an impact on your brain.

• 0:02Ben Gilbert?

  Yeah, it's like with these billions of dollars, the technology companies actually hire psychologists to intentionally do this stuff.

• 0:21Ben Gilbert?

  Welcome to season two, episode three of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:29David Rosenthal?

  I'm David Rosenthal.

• 0:30Ben Gilbert?

  And we are your hosts. It's finally time to cover a no-brainer story here on Acquired, Google's 2014 acquisition of Nest. David, are you pumped?

• 0:40David Rosenthal?

  I am so pumped.

• 0:43Ben Gilbert?

  We, there's no shortage of research for this one. There's no shortage of requests for this one. And actually, it's pretty timely with the announcement coming out last week that Google is rolling Nest back into, or I guess for the first time into its its main hardware business instead of running as an independent subsidiary.

• 1:02David Rosenthal?

  Yeah, I mean, the question is, like, which Nest acquisition or divestiture is this officially going to be about? Because there was the original acquisition, the rolling out into a standalone unit of Alphabet, and now the re-acquisition back into Google.

• 1:18Ben Gilbert?

  Yeah, well, and not to mention a half a billion dollar pickup of Dropcam along the way.

• 1:23David Rosenthal?

  Along the way. We just might cover that.

• 1:26Ben Gilbert?

  It's true. It's true. So to make sure we're on the same page for the full episode, this is the original acquisition of Nest, where they, Google actually wired cash to the bank accounts of people who own shares in Nest.

• 1:43David Rosenthal?

  That's so prosaic, Ben.

• 1:48Ben Gilbert?

  A couple of announcements for listeners before we dive in. David and I have been playing around with a lot of new podcast apps recently, and one of them that's pretty cool is Breaker. So if you're using the Breaker app and listening to us right now, or if you want to try it out, please comment on this episode. We're experimenting with how the rise of social podcast apps sort of affects discoverability and would love, love your, your comment on this episode to see how it compares to the effect of people leaving reviews on iTunes accounts. So maybe if we mobilize the acquired base, we can, we can help discoverability the show.

• 2:26Ben Gilbert?

  If you are new to the show, you can check out our Slack at acquired.fm, over 1,100 strong. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 2:52David Rosenthal?

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• 3:13Ben Gilbert?

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• 3:34David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 3:53Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. So David, I think we've got one piece of follow-up before diving in.

• 4:24David Rosenthal?

  Yeah, so we wanted to do a follow-up on the Apple Beats episode, which actually, kind of hard to believe, was the last episode, just you and me, that we did together.

• 4:35Ben Gilbert?

  That's right.

• 4:35David Rosenthal?

  We've had so many guests and specials since then, which have been great. But in the interim, listener Devin wrote into us about something that we didn't talk about in the Apple Beats story, and that's that Dr. Dre has a history of assault back in his earlier days with NWA, and in particular, assault and violence towards women, which is obviously a pretty important thing, and we should have mentioned it as part of the episode. So now, in this case, it's somewhat of a complicated situation, and we aren't really equipped and acquired to prosecute the specifics of this or any other case, really. But the documentary that we mentioned, The Defiant Ones, addresses it pretty well and pretty fully.

• 5:17David Rosenthal?

  So definitely, you should go watch the movie for lots of reasons, but this is an important one. But that said, we do think it's important for us to acknowledge it, and we want to make sure we put it out there on this show. So, thank you, Devin, for calling it out.

• 5:30Ben Gilbert?

  Yeah, but I think, David, to just underscore your point, this just hit us like a ton of bricks when we got this email, because we, you know, we didn't mention it once on the episode, and it shouldn't go overlooked. And, you know, we do a lot of founder glorifying on the show, and I think it's really important to, you know, look at the whole person.

• 5:48David Rosenthal?

  Yeah, it's a good reminder that, just like you said, Ben, it's easy to treat, you know, founders and Silicon Valley folks as heroes. We often do on this show, but, you know, they're people like any other people, and some have good sides, some have bad sides, and it's just important to remember that. So, we'll try and keep that in mind with everyone going forward. Thanks again, Devin, for pointing it out. And with that, let's move on to Google and Nest.

• 6:16David Rosenthal?

  Okay, so, you definitely can't talk about Nest without talking about the well-known, and at times controversial, though not as controversial as Dr. Dre, co-founder, you know, whose name is basically synonymous with the company. Of course, I'm talking about Matt Rogers.

• 6:36Ben Gilbert?

  Classic. Matt Rogers is always all over the news.

• 6:39David Rosenthal?

  Always all over the news. Matt Rogers is the, is the co-founder and I believe chief product officer of Nest. And we're going to talk a lot about Matt. But no, the person I'm referring to is the quote unquote, "Father of the iPod", Tony Fadell, which, which I presume most folks listening to this show have heard something about in the past. But who is Tony? Well, so Tony grew up in the seventies and early eighties, primarily in Detroit, although his father was a salesperson for Levi Strauss, the jeans company based here in San Francisco. So they moved around quite a lot.

• 7:22David Rosenthal?

  But Tony turns out was really influenced by his maternal grandfather. So his mom's dad, who also lived in the Detroit area. And he was like, this sounds like awesome, kind of depression era, like, you know, self-reliant, like tinkerer, sort of, he was not an engineer. He was a school teacher and a school superintendent, but sort of proto-engineer. And he really encouraged Tony, when he was growing up, to like, fix stuff around the house and do everything yourself and take things apart and understand how they worked. And, and so this had like a big impact on Tony. And then when he was around the age of 12, he discovered computers and took that same approach to computers.

• 8:07David Rosenthal?

  So he got an Apple II, he took it apart, he put it back together, was totally obsessed with it.

• 8:12Ben Gilbert?

  David, can I just pause for a minute? Like, I have, some of the stuff that you find, like, it's like you grew up with Tony somehow. It's like, oh yeah, like, he was down the street from me. And it's just impressive.

• 8:23David Rosenthal?

  Well, there's, we do a lot of research on this show. And a lot of this comes from, Tony was part of,

• 8:33David Rosenthal?

  I forget exactly what this organization is called. It's like the achievement organization or achievers or something like that. And you received a award from them and did a big oral history on kind of his background. So we'll, we'll see if we can link to that in the show notes. But there's a lot of good stuff out there about all this history. And so he's hooked on, he buys the Apple II, he's hooked on computers. He ends up going to college at the University of Michigan. This is in the, in the late 80s, mid to late 80s. And he studies computer engineering, which is a combination of computer science and electrical engineering. So he's getting both hardware and software in school. And

• 9:13David Rosenthal?

  then he also gets an education in entrepreneurship at school. He starts, actually not, not one, but three different companies while he's at the University of Michigan. The largest, most successful of which was a education software company that he started with one of his professors. It was called, I think, Constructive Instruments. So he's, he's kind of, he's got the, he's got the hardware, he's got the software, he's got the entrepreneurship. He's a total Mac nerd and nut. And apparently, he also, he's a subscriber to Macworld. And he's reads the magazine religiously. And he hears about this, right as he's senior, getting ready to graduate, he hears about this stealth startup in Silicon Valley that

• 9:58David Rosenthal?

  was a spin out from Apple, started by a bunch of legends from the initial Mac team called General Magic. And Tony decides, I need to go get a job at General Magic and move out to Silicon Valley.

• 10:08Ben Gilbert?

  So David, before the show, we were texting and you like alerted me to the existence of General Magic. I have like a shame bag over my head of, of like calling myself an Apple nerd and having like, you know, having cared about the company for a long time. Like I did not know about this company. And it's insane. Like, tell us about some of the history of, of General Magic.

• 10:31David Rosenthal?

  Totally insane. So this company was started in the early 90s in the valley. And it was like all the legends from the initial Mac, the original Mac team at Apple. So it was Bill Atkinson, Andy Herzfeld, Mark Porat and Joanna Hoffman. Many, if not all of those, I think are kind of central characters in the Steve Jobs movie, which is another good movie you should all go see if you haven't. And, and they were like all super well known in the Mac community. And they left Apple to start this company and there was, it was totally secret what they were doing. So Tony and, and nobody else had any idea what they were actually doing. It was just that it was this dream team out in the valley.

• 11:16David Rosenthal?

  So he, he graduates, he goes out there and he basically like talks himself into a job with General Magic. I think he was like the 30th employee or something like that. And it turns out that what they're doing is they're basically, they have a vision to essentially build the iPhone. But it's like the early 90s. So it's like way too early for the iPhone. And the company actually turns out it would, you know, consume a whole bunch of capital. It would go public, it would fail, it would pivot a bunch of times. One of the things that comes out of it ends up being OnStar. They'll like, you know, if you've ever driven a Chevy or a GM vehicle, they'll like connected roadside assistant thing.

• 11:57David Rosenthal?

  But the vision was to build a connected, an internet connected PDA, personal digital assistant. That people could keep with them, you know, all throughout their day and their lives. It would be connected to the internet, it could do email, it could do phone calls.

• 12:11Ben Gilbert?

  And amazingly, like some of the other people who worked at, at General Magic along the way. Andy Rubin, who started Danger and Android, Pierre Amidier, the, or Amidier? I never know.

• 12:23David Rosenthal?

  Amidier, I think, yeah.

• 12:24Ben Gilbert?

  Amidier, founder of eBay. Kevin Lynch, who was the CTO of Adobe and now runs Apple Watch at Apple. Like there's this ridiculous mafia of people that worked at, at General Magic. And, and each sort of, even though the company failed, like took little pieces of its vision and made them reality, a different pieces of the ecosystem.

• 12:44David Rosenthal?

  Yeah, yeah, it's awesome. We didn't know when we started digging into the history for this that this was going to be as much an Apple episode as a Google episode.

• 12:53Ben Gilbert?

  With Tony Fadella, you just can't stay away.

• 12:57David Rosenthal?

  You can't stay away from it. So Tony works there for three years in his first job. And it kind of becomes clear that like, the market is not ready, the technologies are not ready for, you know, essentially the iPhone. Yep. So he leaves, but he's not done. He goes to Philips, the big Dutch electronics manufacturer. He becomes the youngest senior management member there. And he essentially tries to do what General Magic was trying to do, build a connected PDA inside Philips. And he spends four years there trying to make it happen, also fails. And he kind of develops a reputation as, it's unclear like

• 13:39David Rosenthal?

  how much of this was, is just who Tony is and how much is, he was intentionally trying to cultivate this persona. But he's like the brash, like, young, like, Silicon Valley hotshot in this big, stodgy company. He gets a reputation for like yelling and screaming during meetings and all sorts of stuff. At one point, I guess Fast Company does a profile on him. And they ask him, you know, what would you be doing if you weren't in tech? And he says, I'd probably be in jail. Which is probably not true, but you know, there we are. That was the reputation he was cultivating. So it's not working. This whole connected

• 14:19David Rosenthal?

  PDA thing isn't working within Philips either. A couple of years later, 1999, Napsters around, the internet's really taking off, music and MP3s are a thing. And Tony's like, MP3s, like, this is the future. I want to get involved in this. I need to go get in this industry. And so he takes

• 14:40Ben Gilbert?

  Isn't there some crazy story about like Toshiba made these tiny hard drives, but they didn't exactly know what to do with them. And somehow Tony's like, oh, I know what to do with them.

• 14:50David Rosenthal?

  Well, that was not Tony, but that was John Rubenstein. We'll get to that in a sec. But so Tony's like, I want to get into music. You know, he could go to Apple, he could do all these things. He's like, I'm gonna go to Real Networks, which is the company in Seattle.

• 15:04Ben Gilbert?

  Yeah, baby.

• 15:05David Rosenthal?

  Right in our backyard. Right in our backyard.

• 15:07Ben Gilbert?

  Which, speaking of, speaking of mafias, the like mafia of people that came out of Reel is, is pretty insane, too. Particularly in the Seattle tech ecosystem, you look around at particularly all the major like successful consumer companies and the, the Real Networks mafia is, is, is probably sort of the most dominant source of talent in the region over the last 20 years.

• 15:28David Rosenthal?

  Yeah, that and the Aquanive mafia, of course, too.

• 15:33David Rosenthal?

  But anyway, so Tony takes a job at Reel. He lasts all of six weeks. Remember, he's like the controversial executive here. He stays at Reel for six weeks. Something happens. And he decides, you know what, I'm still going to pursue this MP3 thing, but I'm going to do my own startup and do it on my own. So he leaves. He starts a company called Fuse Systems. And his approach to MP3s is he wants to build hardware to play MP3s. But he's not yet thinking about, you know, portable iPod style hardware. He wants to make like audio file quality rack mounted like stereo hardware, like something you would keep next to your, you know, receiver in your home hi-fi system.

• 16:15Ben Gilbert?

  Next to your home pod.

• 16:17David Rosenthal?

  Yeah, next to your home pod. Exactly. He's just, he's, he's habitually like 20 years ahead of the, ahead of the world.

• 16:25David Rosenthal?

  So he does that. He starts the company, like I said, in 1999. Things go along, he raises some money, but then the dot com crash happens. And, and it's 2000, 2001, the company, even with Tony's, you know, reputation, is not able to raise money. He's running out of cash. He's trying to figure out what to do.

• 16:47David Rosenthal?

  And so one weekend, apparently. He's skiing. He also loves skiing. This is going to become a recurring theme here. He's skiing in Tahoe and he gets a call on his cellphone and he picks it up and it is John Rubenstein from Apple, who is the SVP of Hardware at Apple. And John had been, was a veteran of Next. So he had joined Next when Steve Jobs was at Next, then came with Steve back into Apple and was running hardware at the time. And so John and Steve have been thinking about the music space for a long time. They just, this is now the like, spring of 2001. They just launched the iTunes software. The store wasn't out yet.

• 17:29David Rosenthal?

  And they're looking for potential to build a hardware player to go along with it. And, and they couldn't quite find the technology to do it. And then apparently, the story is that John and Steve are separately on business trips to Japan. And John's meeting with Toshiba and they show him this 1.8 inch hard drive that they have. And they're like, we don't really know what to do with it, like you were saying. And John's like, I know what to do with this. So apparently Steve was also in Japan at the time. John calls him up and he's like, we gotta get together. They get together for dinner at a hotel and he's like, I've got it. We can do it. A thousand songs in your pocket. Toshiba has the hard drives. We can make it happen. And so Steve's like, all right, go ahead.

• 18:11David Rosenthal?

  And John finds out about what Tony had been working on, calls him up and he's like, Tony, you're the guy. You gotta come in here. We need your help. Can you come do a consulting project for us? And Tony's like, okay, you know, I need some money because I'm running out of cash at my startup. He comes in, he does, starts the consulting project and he quickly figures out that like, this is like the most important thing at Apple going on here. So he spends six weeks. He puts together a whole plan for what components Apple needs to build this hardware, all the software coming together. And, and he actually builds a Styrofoam model of, of what the iPod could look like.

• 18:52Ben Gilbert?

  That's amazing. That's super similar to the, the story of the original Palm. The founder of Palm ended up carving out of a block of wood and then for like weeks, bringing around this block of wood to meetings and pulling it out of his pocket to like, pretend to take notes on the block of wood to see like, does the form factor work for me?

• 19:09David Rosenthal?

  Yeah, it's, you know, product design. It starts with tinkering.

• 19:13Ben Gilbert?

  That's right.

• 19:14David Rosenthal?

  So, so the end of the project, he presents to the whole senior leadership team at Apple and they're like, "Okay, great. We want you, we want to hire you to come do this." And Tony is like, "Well, but I've got this startup and I've got all these employees." And

• 19:31Ben Gilbert?

  Which, let's be clear, like, how is he doing a consulting gig while running a startup? Like, for anybody running a startup, like, imagine going and taking on a, you know, incredibly important product, even for like a month and a half at a company like Apple. How does that work?

• 19:46David Rosenthal?

  Yeah, this is where the research gets a little unclear.

• 19:51David Rosenthal?

  This is the problem with, you know, when you're listening to Tony tell the story only from his side. I couldn't find anything out there of how the employees of Fuse felt about this.

• 20:00Ben Gilbert?

  It feels like there may be like a very strong COO presence or something at Fuse.

• 20:05David Rosenthal?

  Yeah, well, who knows? So, anyway, Apple and Steve and John Rubenstein are like, "Great, we want to hire you. We don't want to acquire Fuse. We want to hire you."

• 20:16David Rosenthal?

  And, and after a bunch of thinking about it, Tony says, "Okay, fine." So he shuts down Fuse and he goes to work in the spring of 2001 for Apple. And basically, like, this becomes the focus of like the entire company for the next couple of months because they want to get the product shipped for the holiday season. And they do. It's kind of, it's pretty amazing from like, it's, it's like 10 months from when Rubenstein sees the 1.8 inch hard drives at Toshiba in Japan till they, they shipped the iPod in October of 2001.

• 20:51Ben Gilbert?

  That's mind blowing. Like, think about the number of Kickstarter's that like take three years and then don't ship a product. I mean, to be able to do that in 10 months.

• 20:59David Rosenthal?

  Totally mind blowing. And I promise this is all leading to Nest eventually.

• 21:05David Rosenthal?

  So Tony stays on at Apple after they shipped the first iPod. He ends up working on the next 18 versions of the iPod. And in 2006, John Rubenstein retires and Tony replaces him as SVP of the iPod division. So he's reporting directly to Steve, one of the senior managers, most senior managers within Apple. And so just before that happened, I promised that Matt Rogers would come into the story eventually. The famous, famous. The famous, famous Matt Rogers. He, the iPod team hires an intern from Carnegie Mellon. He shows up and I think this was 2005 and it's Matt and he shows up and, and he gets,

• 21:48David Rosenthal?

  they sit him, I don't know if he was the first intern or one of the only interns on the iPod team. They sit him next to the printer cube and like, they basically make him do like all of the grunt work for, for the iPod team. And Matt like loves it. There's, he does a great, he does a great entrepreneurial thought leaders talk with, at Stanford, a couple of years after he started Nest and talks about this and how like, he was just so happy to be working at Apple, so happy to be working on the iPod team. He was like fetching printer paper. He was traveling around the world handling logistics for like installing firmware on the iPod shuffle and all this stuff. So he makes a big impression on, on Tony and apparently at the end of the summer, Tony

• 22:33David Rosenthal?

  gives him a cash bonus for his work during the summer, which like the, the Apple and the iPod team had never done before. Matt was the only person to, to have this happen. So he graduates, he comes back to work for Apple and for the iPod team, right as Tony is getting promoted to being the head of the whole thing. And this was in 2006. And at the same time, this is when the iPhone is starting to get worked on within Apple. And this is so cool, reaching back to other of our episodes here. And it was fun to read about this there, as, as is now kind of widely known, there were two competing projects to become the iPhone. Purple one and purple two.

• 23:14David Rosenthal?

  Yeah. And so I think, I think the iPod, I think Tony's was purple one. And it was, the, the plan was they were going to take the iPod software and hardware and push that towards a phone. And so Tony, Matt, everybody's working on that. And then competing within the company, Steve also had Scott Forstall take OS 10 and try and shrink that down to fit it onto something the size of a phone. And, and famously, the, the direction that Tony goes is the, like, using the iconic click wheel for the iPod, and that's the primary interface to the phone. And Scott goes with the touch interface.

• 23:55David Rosenthal?

  And, and, and this is all now talked about when the 10th anniversary of the iPhone happened last year, both Tony and Scott, you know, did a bunch of interviews and talked about this. And apparently, it was like, pretty bitter rivalry within the company between these two teams.

• 24:10Ben Gilbert?

  I bet. It's interesting, too, thinking about, like, you know, now, now, when we reflect on like, Apple's revolutionary interface, it's, it's multi-touch, like that, they, they invented this incredible capacitive touch thing that is like, the dominant way that people interact with technology now. But they had already done that once before, like, Tony and team with the iPod, the, the, the click wheel was completely revolutionary.

• 24:34David Rosenthal?

  Completely revolutionary.

• 24:36Ben Gilbert?

  You know, compared to like, the Rio player is, and the Walkman that came before it, like, it was a completely different experience. And, and, you know, companies, companies rarely have, like, that, that dominant of an innovation twice. Or, and you could argue multiple more times after that, too.

• 24:52David Rosenthal?

  Yeah. It's, it's pretty amazing. And, and it all comes from different people within Apple.

• 24:59Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 25:14David Rosenthal?

  Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 25:27Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

• 25:37David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 25:55Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 26:11David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 26:28Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 26:37David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. So, obviously Scott Forrestal's team with the multi-touch wins the battle, the battle of the codename "purple iPhone," the future of the iPhone. And this was shocking when I saw it. We're going to link to this in the show notes. So if you watch the demo in January 2007, when Steve Jobs announces the iPhone, like probably the most famous Steve Jobs moment in history, when he's walking through how the phone app works and

• 27:19David Rosenthal?

  he's going through the favorites, he's showing how you can add favorites, the favorites tab, and it's all visual and this is all new. And then he talks about like, and you know, it's easy to remove somebody. And he removes a contact from his favorites. The contact he removes is Tony Fadell.

• 27:37Ben Gilbert?

  No way.

• 27:39David Rosenthal?

  Cold-blooded.

• 27:43David Rosenthal?

  It's brutal. And of course, nobody knew, but apparently, you know, there are a bunch of interviews now, afterwards now, this is all come out that like, all the engineers, at least on the iPod team, like knew that that, like, they knew exactly what that meant.

• 27:58David Rosenthal?

  And so as, as you know, foreshadowed by Steve in the demo, within the next couple of months, Tony is gone from Apple. And, and so he's, it's, it's now late 2007, 2008, he's left Apple. His wife, who he had met at Apple, they, they both leave and they're like, all right, we're, we're done with this. Like this is, this is too much. We're going to spend some time with our kids. They have young kids. They do two things. One, as you mentioned, Tony had always loved skiing, he loves Tahoe. They decide they're going to build their dream vacation home in Tahoe and they're going to travel all around the world, make up for all this time they'd spent, you know, at Apple, working super hard for

• 28:41David Rosenthal?

  the last 10 years. So they start, they start building the Tahoe house and, and then they're traveling around the world. They start spending a lot of time in Paris. They end up buying an apartment in Paris. But when they're working through the Tahoe house, Tony's like, he's kind of like going back to his grandfather and like, as he talks about it and like, you know, tinkering, wanting to be involved with everything. He can't help himself. And he's like, all these products, everything that's going into the house, it's all like total BS. Like these things suck. Like I can do so much better. So he's, he's thinking about that. He also wants the house to be super green and energy efficient. He's finding it really hard to do that. And, and he ends up one day, he, when he's back in the valley

• 29:26David Rosenthal?

  and he's from, from Paris and he's working on the, on the Tahoe stuff. He, he gets lunch with his old intern with Matt. And it turns out that Matt had also bought a house recently in the valley and, and the house was like from the seventies and had all this old, you know, seventies style equipment in there. And Matt's also trying to kind of retrofit it, having a super hard time. And Matt's like, you know, he's having lunch with his like bosses, bosses, boss, who he was the intern. He's like, we should start a company together.

• 29:54Ben Gilbert?

  Which, which is

• 29:55David Rosenthal?

  We gotta do this.

• 29:56Ben Gilbert?

  That is the strangest feeling after you leave a company and someone was like a mythical person from on high that you only saw speak to a thousand people. And, you know, you may have had one or two interactions with, but like then, then to just like, all the pretense is gone because you both left the company and you have, this happened to me just a couple of times. And you're like, oh my gosh, like that it's weird to collapse all those levels of management and then just have like a human to human relationship with someone.

• 30:23David Rosenthal?

  Yeah. I mean, you're talking about a guy who was literally once in Steve's Jobs favorites on his iPhone.

• 30:32David Rosenthal?

  So, so Tony's like, yeah, I don't know. I'm kind of enjoying this, you know, Paris thing. But, you know, maybe, maybe like you work on it and you see, see kind of what's there. So Matt throws himself into this. He's still at Apple. He starts doing a ton of market research. He gets Tony excited. They're doing it too. They're talking to installers. They're going and they're looking at homes. They end up talking to somebody in the EPA who's done a lot of thinking about how thermostats can influence, you know, energy consumption. Matt was still at Apple during this? And Matt was still, still at Apple during this. And, and so he's pumped. He's trying to get Tony excited. And then supposedly, as the story goes, told by Tony, one day, he's back in Paris. He's, he's just dropped his kids

• 31:16David Rosenthal?

  off at school, I think. They're at a French preschool and he's walking along a bridge by the Louvre and he looks at the Louvre and he, and he thinks about all the like great stuff and great creations in there. And he's like, you know what? I'm not done. I want to, I want to get back in it. And so he calls Matt up from a bridge over the Seine. What a setting right there. What a setting. And he's like, I'm in, we're doing it.

• 31:40David Rosenthal?

  So, so Matt leaves Apple at this point, rents, of course, a garage in Palo Alto and starts, starts tinkering on, on stuff. And, and apparently in those early days, like nobody even knew that Tony was involved. They wanted to be super, super stealth. So it was just Matt. Tony moves back to the valley in June. He and his wife move back. He becomes CEO and they decide that they're going to name the company Nest because it, you know, the goal is, I don't think they've even landed fully on, on doing thermostats yet. But they want to reinvent the home and they're talking about the, like, what can we call the company? They're talking about the, the, the old MTV show Cribs. And they start riffing on that and that's how they come up with Nest, apparently.

• 32:26David Rosenthal?

  They should have just called it crib. I know. They should have called it Cribs. Maybe, maybe it would be, you know, they would be doing better in Google, but.

• 32:36Ben Gilbert?

  Whoa, Dana, let's, you know, we're not at that part yet.

• 32:39David Rosenthal?

  We're not at that part yet. So they recruit a killer team from, from Apple, folks they'd worked with. They recruit some folks from General Magic and then they make one really key hire. They're, they're able to land Matt's thesis advisor at, from CMU. It's a woman named Yoki Matsuka, who is a pretty incredible person. So in the, in a couple of years since Matt was at CMU, she'd left academia to co-found Google X with Sebastian Thrun. She was a robotics expert in, at CMU and then, and then actually at the University of Washington in Seattle.

• 33:19David Rosenthal?

  And so she co-founds Google X with Sebastian Thrun. She also gets awarded the MacArthur Genius Grant for her work. And, and she'd been at Google X about a year and Tony and Matt are able to recruit her away. And she joins as VP of Technology in the super early days at Best. And, and then Sebastian, he's like, of course, interested by this. So he ends up getting involved. He becomes an advisor to the company as well. So there's a lot of, lot of.

• 33:46Ben Gilbert?

  While he's still running Google X?

• 33:48David Rosenthal?

  While he's still running Google X, yeah. So September of that year, 2010, they raise a nine and a half million dollar Series A from Kleiner Perkins and Shasta. And then they get to work. At this point, they've decided that the thermostat is their entry point into the home. They want to build a, a whole, you know, generation of, of both products, hardware products, to make the home more intelligent, but also the software layer and the operating system that's gonna, that's gonna bring it all together. So they raise, they raise their Series A and then apparently in early 2011, so they don't ship the product until they take a whole year. October 2011, they ship the product. In early 2011, though, Sergey Brin, the Google co-founder,

• 34:30David Rosenthal?

  sees an early demo and an early version of the thermostat and apparently he's blown away. He thinks that like immediately this is gonna be the next, you know, after, after smartphones, the home is gonna be the next operating system. He wants to acquire the company right away.

• 34:47David Rosenthal?

  And, and the company said no. So that was the first time Google tried to buy the company.

• 34:51Ben Gilbert?

  Well, perhaps my grade at the end of this episode would have been higher if it was bought at that stage.

• 34:58David Rosenthal?

  Well, we maybe, we'll have to save it for what would have happened otherwise.

• 35:01Ben Gilbert?

  That's right. And, and so it's worth like touching on, you know, now this doesn't seem as revolutionary. Like, of course, the smart home, you know, it's, it's, it's in many news stories. There's many great companies. It's a lot of funding around this now. Clear ecosystem plays with Google Home and Alexa and all that. This is ridiculous at the time. Like, I remember seeing their landing page and it's like, it's Apple-esque and it's beautiful. And it's got the thermostat on it and it's, you know, announcing like, at some point we'll ship this thing and you can get information and updates here. And just the, the media cycle around this was just ripping it apart. Like, this is the peak of Silicon Valley, you know, buying their own BS. Are you kidding me? Like this, this is not innovation, like really thermostats, thermostats is the next frontier.

• 35:46Ben Gilbert?

  And it was just kind of prescient.

• 35:49David Rosenthal?

  Yeah. Well, and I feel like there's a lesson here because the same thing happened with Rover, which, which started right around the same time, almost exactly at the same time. And there were all these TechCrunch articles, like Airbnb for dogs, like this is a sign of the apocalypse. Silicon Valley is over.

• 36:06Ben Gilbert?

  Well, and people thought Aaron, the CEO of Rover initially, people thought he was nuts for going and doing this.

• 36:12David Rosenthal?

  Total nuts. Yeah. I mean, Aaron had a super successful career at, actually somewhat similar to Tony, although I think Aaron's personality and Tony's personality are polar opposites probably. But Aaron was the youngest GM at Microsoft ever. He came from, from Aquanive when Microsoft acquired that. And that he would go work on, you know, Airbnb for dogs. It's crazy. And yet both of these companies, you know, turned out to be quite important. So.

• 36:36Ben Gilbert?

  Fadell from reinventing consumer electronics to make, becoming a thermostat maker.

• 36:41David Rosenthal?

  Yeah. Well, when, if somebody makes fun of your startup, you should probably take that as a compliment. If people care enough to make

• 36:50Ben Gilbert?

  Or at least it's still likely to fail. But if people aren't making fun of it, you know for sure it's not going to be huge.

• 36:57David Rosenthal?

  Yeah. So the next year, October 2011, as I mentioned, they launched the product Nest Learning Thermostat. There's a ton of buzz, ton of hype. They raise a $55 million Series B, which remember, this is back October 2011. Like we're not yet in the steroid era of like super rounds for startups. This is one of the early, like a $55 million Series B is a lot for a company that just launched a product. But it's all on the back of this hype and the quality of the team.

• 37:33Ben Gilbert?

  And the fact that they're making expensive hardware.

• 37:35David Rosenthal?

  That's a

• 37:39Ben Gilbert?

  startups are making. Yeah, I mean, it just feels like it's a super capital intensive business to do that R and D and production.

• 37:47David Rosenthal?

  Yep, it definitely is. And so the lead of their Series B is, you guessed it, Google Ventures, one of the first big investments out of Google Ventures, which at that point was a relatively new operation within Google.

• 38:04Ben Gilbert?

  And they would actually, they would end up owning at the time of acquisition, foreshadowing a little bit, 12% of the company before even buying it.

• 38:12David Rosenthal?

  Yep, yep. So that was at the end of 2011. 2012, they launched the second generation of the thermostat, which is compatible with a bunch more homes and wiring systems, gets up to, I believe with that version up to like 85, 90% of home, home wiring systems are compatible with, with the Nest, the second version of the Nest. Then January 2013, they raised their Series C. They raised $80 million at a $800 million pre-money valuation and they, it gets announced that they're shipping on the order of 50,000 thermostats per month, which at a, which at a price of $250 per thermostat, puts them well over $100 million annual revenue run rate. Now, as you pointed out, Ben, this is

• 38:58David Rosenthal?

  Hardware revenue with a bunch of costs and expenses associated with it.

• 39:02Ben Gilbert?

  This isn't Facebook here.

• 39:04David Rosenthal?

  This is not Facebook, but still like that's pretty impressive. You know, about 15 months after launching the product. And what is that like, you know, less than three years after starting the company? Or just about three years from starting the company, no, less than three years, you know, at $100 million revenue run rate.

• 39:21Ben Gilbert?

  And I believe not profitable. I think they went all the way through the acquisition and years after, maybe even today, it's not totally clear, but not profitable revenue.

• 39:30David Rosenthal?

  Yeah, not totally clear, but it seems unlikely, especially given how much money they were raising. Presumably they were doing that for a reason.

• 39:40David Rosenthal?

  And so then later in 2013, they launched the second product, which was hotly anticipated. They'd always talked about, you know, the vision of being a fully connected home. And it's funny, like the same thing happens. It's a smoke detector, a smoke detector and carbon monoxide detector. And everybody's like, smoke detector? Come on.

• 40:01David Rosenthal?

  This is what this is next, Nest's next product. And we'll come back to the smoke detector later, but that was October 2013. In January 2014, so a couple of months later, it gets reported that Nest is now going to be raising a monster round from DST, from Yuri Milner's investment firm that invested in Facebook and many others. They're going to be raising over $200 million at a $3 billion valuation. But instead, on January 13th, it gets announced that Google is finally acquiring the company for 3.2 billion in cash. But Ben, as you pointed out, they already owned 12% of the company.

• 40:42Ben Gilbert?

  Yeah, and at this point, still only 280 employees. I mean, to be purchased for that price, making hardware with supply chain and, you know, full operations logistics, you know, retail on their website, channel to retail partners, full R and D team, only 280 employees. It's impressive. I mean, it's 11 billion, 11 million bucks per employee.

• 41:09David Rosenthal?

  It is, it is. And, you know, remember too, like, you know, you mentioned channel, like, that means, you know, Best Buy, that means Lowe's, that means Home Depot.

• 41:18Ben Gilbert?

  Right, right.

• 41:19David Rosenthal?

  That means not just building the relationships with those retailers, but, you know, getting product in shelves, keeping them stocked, you know, all this stuff. It's not, it's not easy doing this stuff.

• 41:32Ben Gilbert?

  Totally.

• 41:34David Rosenthal?

  So it's announced, and the terms of the deal are pretty interesting. So Nest is to remain wholly independent. So Google is still Google at this point. There's no alphabet yet. But they announced it very clear. This is going to be like YouTube, gonna, you know, Tony's gonna remain CEO, the management team, Matt and Yogi and everybody else are gonna stay independent, gonna have their own offices.

• 41:58Ben Gilbert?

  Which, which is very much a Tony demand. Like, we're not getting bought by Google to be integrated and me to have a boss. Like, I get my own P and L, I get my own budget, you know, we're, we have our own office.

• 42:09David Rosenthal?

  And remember, of course, you know, Tony is a, is the veteran of first General Magic, and then Philips, and then Apple, where he's seen all these corporate politics play out. And, you know, he's kinda, he's had a lot of success, but he's also ultimately lost the game in every case. And so supposedly, there was a term in the, in the deal, it's not public, no way to know, but it's been reported that there was a term in the actual documents that Nest was given five years runway, end up completely independent of any financial goals. So essentially, as much financial resources as they wanted to with the goal of building, like, the OS layer, hardware and software for the connected home,

• 42:52David Rosenthal?

  and no accountability for any sort of profitability or revenue growth, supposedly, in the, in the deal.

• 43:00Ben Gilbert?

  And then is it later that they wanted them to hit $300 million a year of revenue? There was some target set there at some point?

• 43:07David Rosenthal?

  Yes, yes. Okay. So that was January 2014. That was basically the high water point for Nest, or at least for Nest and Google's relationship.

• 43:18Ben Gilbert?

  And here's an interesting data point on that, too. So from Google's 10-Q that they filed with the SEC a few months after this happened, they talk about how they came to value the deal. And so they say the fair market value of our previously held equity interest was $152 million. So that's that 12%. $51 million bucks was cash that they acquired, so from the last fundraising round, or however they were generating cash at Nest. $430 million was attributed to intangible assets, $157 million to net liabilities assumed, and $2.35 billion attributed to goodwill that is primarily for the synergies

• 44:03Ben Gilbert?

  expected to arise after the acquisition. So, you know, this is not a multiple of current cash flows or anything like that. This is a, we believe there are serious, serious synergies with Google, and that's why we're doing this.

• 44:15David Rosenthal?

  Yeah. And interesting, what did you say, $51 million in cash at the company that acquired? Yeah, okay. So, and they had raised at that point about $145, $150 million. So that means they burned roughly $100 million on the product. Now, it's, we don't know what their cash flow was like at the moment in time they were acquired, but I think it's safe to assume they were not profitable and burning a lot of cash.

• 44:44Ben Gilbert?

  Right, right.

• 44:45David Rosenthal?

  Even with the relatively small amount of employees, as you mentioned. Okay, so that was January 2014. Now the bad news starts. April 2014, they have to halt sales of the second product of Nest Protect of the smoke alarm and carbon monoxide system because apparently there was a way for the alarm to accidentally be disabled through.

• 45:11Ben Gilbert?

  You had one job to do.

• 45:15David Rosenthal?

  And so it's a pretty bad thing if your smoke alarm doesn't doesn't go off. So they have to recall all the units that are on the shelves at all their retail partners. Fortunately for units that are already installed, they're able to do an over the air software update. But but not a good way to to start under under new ownership of Google. Then the next thing that happens to start there with with not protecting your customers homes.

• 45:43Ben Gilbert?

  Ew.

• 45:46David Rosenthal?

  In June 2014, Nest acquires Dropcam, which was a very cool company. They made Wi-Fi connected cameras that you could drop around your home, hence Dropcam. And apparently, Google Corp Dev, Google, the parent company, had been pursuing this this deal for a while. And then kind of sent it over to Nest and said, hey, we want to acquire this. Like, why don't we make this part of Nest? And Nest says, OK, they acquire it. And it's basically a complete disaster from a cultural standpoint.

• 46:20Ben Gilbert?

  So didn't the founder leave like immediately?

• 46:23David Rosenthal?

  Well, not immediately, but there's even more drama than that. So so Dropcam, the founder Greg Duffy, he had worked for Zabney, which is inbox backwards. That was one of Y Combinator's first companies in one of the first batches of Y C.

• 46:38Ben Gilbert?

  And that was like reportive, right? Like, it was like a Gmail plugin CRM type.

• 46:42David Rosenthal?

  Yep. Yeah, it was like, I think it was like an Outlook.

• 46:44Ben Gilbert?

  Yeah.

• 46:45David Rosenthal?

  Plugin CRM. And I actually got it confused with Plaxo, which was trying to do the same thing, which was Sean Parker's startup after Facebook. Or no, before Facebook. Anyway, so that's kind of the DNA that that Greg Duffy, the founder of Dropcam, came from was like, right out of school, joins this Y C company in the first batch. He's there for two years. He starts Dropcam. A lot of the folks at Dropcam would then go on to like plenty of other like, you know, new startups in the valley afterwards. So it's it's kind of a young, like, you know, scrappy team. Super different from like the Apple DNA that Tony and Matt are bringing to are bringing to Nest. So.

• 47:28David Rosenthal?

  Basically, nothing happens. They had this roadmap and the next major product that Nest was working on was a security product, like a home alarm system. And Dropcam had also been working on a security product, I think called Tabs. But Nest put Dropcam, and that was like, pretty close to launching. Nest puts Dropcam's security product on indefinite hold, moves everybody over to working on the Nest product, and it just keeps getting delayed and delayed and delayed and doesn't ship. And so like, a year goes by, and Greg Duffy, the Dropcam CEO, he's really frustrated. He sends a memo to Larry Page saying that Tony is-

• 48:12Ben Gilbert?

  That's always good. When someone feels that they need to-

• 48:13David Rosenthal?

  Always good.

• 48:14Ben Gilbert?

  Email the CEO directly.

• 48:15David Rosenthal?

  Email the CEO. He emails, he emails, this is all reported on, and then later published. He emails Larry Page and basically says, "Tony is completely mismanaging Nest. He should be fired, and I should be the CEO of Nesta."

• 48:31Ben Gilbert?

  Oh, God. We've seen this story before.

• 48:34David Rosenthal?

  Yeah. And it predictably does not play well for anybody, really. First of all, Greg. So Greg, pretty immediately after that, leaves the company. Larry sides with Tony. And as this story gets even worse, so Greg's leaving, and Tony then is interviewed in an article by The Information, and he badmouths not just Greg, but the whole Dropcam team, and says that they were, quote, "not as good as we hoped. It was a small and not very experienced team." So it just completely throws them under the bus. Not, not, not good, not pretty. In response, Greg writes a Medium article, which is still out there,

• 49:16David Rosenthal?

  basically taking all of his complaints that he emailed Larry about with Tony and Nest, and publishing them, publishing them for the public, and implying that Tony took, you know, essentially all of Steve Jobs's personality traits, the yelling and the screaming, without his, you know, product sense.

• 49:36Ben Gilbert?

  That's right. I remember that.

• 49:37David Rosenthal?

  Yeah. Fun stuff. So, once again, we're not here to opine one way or another unacquired, but certainly made for a lot of drama.

• 49:45Ben Gilbert?

  That's what I'm here for. I mean, speak for yourself, David.

• 49:51David Rosenthal?

  So now what you were referring to earlier, Ben, all while this is going on, another big thing happens at Google, two big things, actually. First, they hire Ruth Porat to join as CFO. And Ruth had been CFO of Morgan Stanley before coming to Google. And a big part of Ruth's coming, you know, as was talked about, and I think it's played out in practice, is bringing a lot more structure to Google and particular financial discipline. So she's part of the whole sort of restructuring of Google into Alphabet. And that happens at towards the end of 2015. Now, apparently, when that happens, all of those agreements between Nest and Google got redone.

• 50:34David Rosenthal?

  So the the five year runway, the lack of financial accountability. If it existed in the first place, it certainly doesn't anymore. Once Nest gets pushed out as its own independent company under Alphabet.

• 50:47Ben Gilbert?

  And part of this, too, if I recall, was that during the acquisition, there was super, super heavy incentives for the management team and key engineers to stay at Nest. Right? Like they, I think they couldn't, they couldn't sell their. No, wait, it was a cash deal. So maybe they just didn't get Google Stock Awards or something for an extended period of time.

• 51:11David Rosenthal?

  Or it could have been escrowed.

• 51:13Ben Gilbert?

  Hmm.

• 51:15Ben Gilbert?

  But yeah, I do remember there was, it was an abnormal, sort of abnormally long retention period.

• 51:23David Rosenthal?

  And I suspect that is definitely the case because now some, now some just weird behavior starts, starts occurring. So at the very end of the year, there start to be rumors that Alphabet's looking to sell Nest. That Nest hasn't been able to ship products. They're not realizing their vision of, you know, what Google and Alphabet really care about, which is like the operating system for the connected home.

• 51:46David Rosenthal?

  And, and, and Tony, of course, is really unhappy about this. But for whatever reason, maybe retention reasons, he stays at, he stays at Google. He starts also working on the Google Glass team, redoing Google Glass to be, you know, less darky.

• 52:05Ben Gilbert?

  Literally looking to maintain the same W2 so he gets whatever bonus needs to happen.

• 52:10David Rosenthal?

  You said it, not me.

• 52:12Ben Gilbert?

  And they also, they got so serious into trying to sell Nest, it had like a project code name called Amalfi, Project Amalfi.

• 52:19David Rosenthal?

  Interesting. I didn't see that.

• 52:20Ben Gilbert?

  And failed to find a buyer, though.

• 52:23David Rosenthal?

  Yeah, wow.

• 52:26David Rosenthal?

  And, and then, then the icing on the cake, the kind of last straw on the camel's back here is in May of 2016, a Nest employee files a complaint against Google with the National Labor Relations Board, saying that Alphabet and Nest fired him because he was posting on Facebook about all the leadership issues at Nest. So it's just a firestorm. And then the next month in June 2016, Tony finally leaves Nest.

• 53:00David Rosenthal?

  And, and, and since then, you know, whether all of these problems were on Tony, on Google, on Greg and Dropcam, who knows, probably some responsible responsibility is shared amongst all of them. But things do start to turn around at Nest. So, so they bring on a new CEO, Marwan Farwaz, to replace Tony. And Marwan came actually first from the cable industry, but then he was part of Motorola and part of Motorola when Google owned Motorola, flashing back to our HTC episode and Android and everything here. And he was part of the division that made set-top boxes and cable modems within Motorola. And so he worked with Rick Osterloh, who was head of Motorola, head of Motorola under Google, now has come

• 53:44David Rosenthal?

  back and is Google's SVP of Hardware. So they have a working relationship. And, and once, once he joins, things start to move a little farther. So, so first big thing that happens, which we're definitely going to talk about in tech themes, Google itself launches Google Home in late 2016, which is their Echo, Amazon Echo and Alexa competitor. Now, interestingly, totally separate from Nest. So it was Google, Google's hardware division that worked on that, not Nest.

• 54:13Ben Gilbert?

  Which, when you, when you start reading blog posts that are trying to rewrite history a little bit, they talk a lot about the sort of the shared DNA and collaboration and how we couldn't have done it without working together. And I think over time, they became much more integrated. But yeah, certainly, certainly was a little odd when Google Home got announced and it had nothing to do with Nest.

• 54:33David Rosenthal?

  Yeah, yeah. But in the meantime, Nest, so Nest finally ships a new camera, a new Dropcam product, Nest Cam Outdoor. And then they followed that up with Nest Cam IQ, which is actually uses, starting to use some of Google's expertise here. They use machine learning to recognize faces in the Dropcam. So for security features, you can tell if it's someone who's supposed to be in your house or not supposed to be in your house. Late last year, they launched a lower, a lower priced version of the thermostat, I think called the Nest E, thermostat E, or something like that. And then they also finally launched the security product, Nest Secure, after a bunch of, bunch of delays,

• 55:16David Rosenthal?

  along with Nest Hello, which is a smart doorbell camera, sort of like the Ring doorbell. And then all of that happens.

• 55:24Ben Gilbert?

  Sort of like.

• 55:26David Rosenthal?

  Sort of, sort of like, inspired by.

• 55:30David Rosenthal?

  All of that happens, we mentioned at the beginning of the, this whole history, Matt's thesis advisor at CMU, Yoki Matsuhoka, who was the VP of Technology, when all of this drama really started going down, she actually left Nest in 2015, and she went to Apple, of all places. And then, and then in 2017, she left Apple, came back to Nest, rejoined Nest as CTO in 2017, right before they launched the ML version of the camera. And now she's Nest CTO again.

• 56:06Ben Gilbert?

  Wow. Man, the, the horse trading here is pretty amazing. Everybody cycles through Apple and Google in some way.

• 56:15David Rosenthal?

  In some way, and general magic.

• 56:17Ben Gilbert?

  Yeah. Well, let's, let's, let me take a minute here to talk about some of the, the financial numbers that evolved throughout this time and sort of how is Nest doing today? And how, how did it, you know, how was it doing sort of from 2014 on? You know, it's, it's difficult to know exactly. There's some, there's some leaks that have happened. So we know those things. There's things we can infer by looking at the large percentage of Google's Other Bets category, which come from Nest revenue. And so let's, let's dive into those a little bit. So I mentioned there was a mark that Nest was supposed to hit that was $300 million a year in revenue. In 2015, they did hit that. They had 340 million in revenue as

• 57:00Ben Gilbert?

  reported by a leak out of the division, and that includes the DropCam revenue. So a lot of people were speculating they probably weren't going to hit that alone, but having DropCam helped them sort of bolster and hit that goal. You know, things, it was an expensive division to run. It stayed very separately. They've got all this turmoil. So, you know, in 2016, they were, they were looking to explore a sale. It didn't happen. So, okay, let's look at what in 2016, 2017, what actually happened in the Other Bets category. So for the first nine months of 2017, it did quite well. The revenues grew

• 57:39Ben Gilbert?

  by 45% in Other Bets, up to 794 million, and we're on pace to exceed a billion in 2017. It's pretty fair to assume that happened. And it was reported in 2016 that Nest had contributed about three quarters of the Other Bets revenue. And while the other segments of Other Bets are growing, there's certainly nothing revenue generating on the scale that Nest is revenue generating. So, you know, we- And YouTube is not included in Other Bets, right? Correct. I believe that rolls up under Google. I think that's right now, but I haven't actually read Google's 10K in a while. I'm not sure. Alphabet's 10K. It's definitely not Other Bets, because it generates a ton of revenue, at least

• 58:24Ben Gilbert?

  as far as we could tell, a year or so ago, it was about a break even business at YouTube. Yep. But despite the growth in revenues, these businesses and Other Bets continue to lose money. So, and again, in the first three quarters of 2017, they reported 2.44 billion in operating losses, and Google's operating profit rose by 20% to over $24 billion. So if you look at, you know, the Other Bets is losing 2.44 billion. Google's operating profit as an entire, you know, or actually just the Google division is 24.1 billion. So, you know, losing a colossal amount of money over Other Bets, you know, that's largely attributable to Waymo and a lot of the other sort of major R and D things

• 59:08Ben Gilbert?

  they're doing. But, you know- But you've got to imagine Nest, too. Yeah, yeah, because there's, you know, three, four new products coming out at a pretty rapid clip here from Nest and a lot of hardware R and D to get there.

• 59:21David Rosenthal?

  Yep.

• 59:22Ben Gilbert?

  But it is, it is, you know, we should look and say conservatively that Nest is doing over a half a billion in revenue now.

• 59:31David Rosenthal?

  Yep.

• 59:31Ben Gilbert?

  Annually, and that's, and that's, and that's gotten better. And, you know, the last year, I think, looked really promising for them. They're starting to do more integration with Google Home, but they still feel largely like two separate ecosystems. And in fact, Nest integrates quite nicely with Alexa and it's kind of an accessory to the, oh, that's hilarious.

• 59:53David Rosenthal?

  Lady A, Ben.

• 59:54Ben Gilbert?

  Yeah.

• 59:55David Rosenthal?

  Lady A.

• 59:55Ben Gilbert?

  That's right. That's right. I woke her. But yeah, you know, I think we'll get a lot into talking about the sort of vertical horizontal strategy there, but Nest products doing well, is it contributing to the, the operating system of the home effort on Google's part, you know, TBD?

• 1:00:15David Rosenthal?

  Well, I mean, let's, this is the perfect segue into the, finally, the end to the history and facts here, which is that in the first week of February in 2018, there is an announcement that Nest is getting acquired again. It's just getting acquired by Google, moving from the wholly separate division under Alphabet in the Other Bets category, being integrated back into Google as part of the hardware team led by Rick Ostelow. And there's going to be much tighter integration now between Nest, all of its suite of products, and Google Home and everything that's an Android and everything that's going on, going on on the hardware, from a hardware standpoint within Google. Interestingly, so Matt Rogers,

• 1:01:01David Rosenthal?

  the famous co-founder, who actually seems like a really awesome dude, was, he stayed at Nest throughout all of this. The day after that announcement, he announced that he was leaving. So he'll now be leaving Nest and both founders are gone and it'll be fully within Google.

• 1:01:18Ben Gilbert?

  He's transitioned to a full-time investor, right? He's going to be in venture.

• 1:01:22David Rosenthal?

  I think that's the that's the plan for now. Now, interestingly, Tony, so when Tony left left Nest back in the summer of 2016, he resumed where he was before starting Nest. He moved back to Paris. So he and his family moved to Paris, and he's been very vocal that he's going to live in Paris indefinitely now. He has started his own venture investing practice with his own money. He hasn't raised any outside money called Feature Shape. And he's all in on Paris. And he's given a bunch of interviews, very, very anti-Silicon Valley. And you can sort of imagine that. I mean, he's had such negative experiences with the

• 1:02:05David Rosenthal?

  biggest companies in the Valley. So it'll be super interesting to see how this all plays out. He's still he's funding companies in Europe and in the US and in the Valley. Some of his portfolio companies have had run ins and fights with Apple, with Google. So he's still very much part of the scene, but hanging out in Paris.

• 1:02:25Ben Gilbert?

  Wow. Leave the gloves on, but just hang out far away from the fight.

• 1:02:30David Rosenthal?

  Yeah.

• 1:02:32Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:02:45David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:03:02Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:03:17David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:03:41Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:04:00David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:04:30Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you. All right, acquisition category.

• 1:04:57David Rosenthal?

  All right. This, this one might be even harder to, harder to tell than the history and facts here.

• 1:05:02Ben Gilbert?

  Yeah, I mean, so what it comes down to for me is what Google said they were going to do and what they did. And so, you know, I mentioned earlier, kind of foreshadowing my, my feelings about this. Massive amount, 2.35 billion of the 3.2 billion of the purchase price was attributable to synergies. We believe that we'll combine these businesses in some way and it'll bolster our existing business. So when you start walking through Google's existing business, it is we make a ton of money on search ads because when people have intent to do anything on the internet, then

• 1:05:43Ben Gilbert?

  they go through Google and businesses pay the Google tax to acquire those people as customers. And so that's their business. It's to be horizontal and broad and touch as many people as possible and get as much data about all people as possible so that they can more effectively advertise to them. It's Google's core business. It's super different than Apple's business of making hardware differentiated by software that they charge a premium for. It's not that business. Nest was making sort of the high-end hardware bets that Apple had made. I mean, Tony came from that business, understood that really well.

• 1:06:25Ben Gilbert?

  And so when I look at this synergies, you would think that what they do with Nest is integrated into Google and help build that corpus of data and that ecosystem of being a Google user so that they can better have their core business and advertise. What they actually did was, as a separate business unit for this long, try and hedge their bet and say, where does our next multi-billion or multi-hundred-billion-dollar innovation come from? Maybe it's an Apple-like business that exists next to a Google-like business in this subsidiary portfolio called Alphabet. And it actually is not a synergy with the Google business that feeds data in there.

• 1:07:08Ben Gilbert?

  And it's a separate thing, and it is realizing Tony Fadell's vision. But they flip-flop back and forth on it so many times that I think that $2.3 billion was just super value-destructive. They, if they were gonna build, if they were gonna have Nest and do with Nest what they did, they should've acquired it for a couple billion less, or they should've gone harder at this strategy of synergy. So I'll say what they ended up buying was a business line and massively overpaying for it.

• 1:07:41David Rosenthal?

  Are you saying there's a vertical and horizontal issue here?

• 1:07:47David Rosenthal?

  Yeah, I mean, I think, I think to me, as I was thinking about this, like, and I, believe me, we had a long time to think about it during that history and facts.

• 1:07:56David Rosenthal?

  I think the problem is that Google didn't really know what category they were buying when they bought it, right?

• 1:08:04Ben Gilbert?

  And there's a compelling argument for each one, but make one and carry it out.

• 1:08:08David Rosenthal?

  Yeah, yep, yep. And, and if you think about how it started, like, this whole relationship started, well, it really started when, you know, when, when Yoku, when Yoki joined the company and Sebastian Thrun was turned on to what was going on here. And then when Sergey saw the prototype, you know, and I think what, what it seems like that Google got excited about, rightly so, is this idea of like, this could be the next computing platform, you know, after, after smartphones.

• 1:08:41Ben Gilbert?

  Right.

• 1:08:42David Rosenthal?

  And, and that probably was the right thing to get excited about. But I don't think they thought through, like, how to, what the right way to attack that is. And I was thinking about this, like, the parallels between the Google Nest acquisition and the Facebook Oculus acquisition are like really apt, I think. Because in both cases, like, what was, what was hot at the time were these, you know, quote unquote, Facebook style acquisitions of, we're going to buy these promising companies. We're going to let them be independent. We're going to give them a ton of runway. You know, the Instagram style, the WhatsApp style. But I think the difference is, like, those worked because fundamentally, those are not platform companies.

• 1:09:24David Rosenthal?

  Like, those are networks and services built on top of computing platforms. But what Oculus and what Nest were trying to do, they were trying to build new computing platforms. And when you're trying to do that, when you're trying to be a, you know, a full, full stack, hardware, software, OS company along the lines of, of Google or Apple, you need as much resources as possible and you need like the best engineers in the world and the best product people. And if you, you know, there's a hardware, hardware element, the best folks there too. And so I think leaving them separate was kind of like not, not realizing the best vision. And, and now you see like Oculus is now integrated into Facebook. And Nest is of course now integrated back into Google. I think if you're gonna make

• 1:10:09David Rosenthal?

  a platform play, you gotta be have the resources of a platform company.

• 1:10:13Ben Gilbert?

  Yep. And there's, there's one thing when I was doing research for this, there's a Strategery quote that's like just it's too freaking spot on not to, not to use because it's a brilliant framework. So if you think about, um, if you think about what Amazon did with Alexa, like they just, hang on, I gotta let me turn her off.

• 1:10:36Ben Gilbert?

  If you think about what Amazon did with Alexa, they said there's going to be a home operating system and there's going to be a, a center control point for that. And we believe it's going to be voice. And so we're just going to build the central controller. And then there's a whole ecosystem around it. And they just went right through the middle, right? They said, this is it. This is, this is the, this is the heart and soul of this thing. This is the digital hub. Um, and when you look at what Google's strategy was, it's, we don't know exactly how that ecosystem will play out. We know there's going to be an operating system of the home. This feels like a good vector into it. But what they ended up doing was kind of creating the, the side entry, the same way that Microsoft wanted to, to own the living room. Um, and so they created a gaming console that, that fit into an existing market and tried to branch out from there. And so Ben, Ben Thompson's

• 1:11:21Ben Gilbert?

  quote in, in Strategery, which I think is just a brilliant, brilliant point is in any new market, it pays off to simply aim for the sweet spot. Amazon Echo is unabashedly trying to be the key interaction point for an automated home. Nest is more of an attempt to slide through the side door. And it's so, it's, it's such a simple way to think about it. Like if there's an existing market, you have to figure out how you're going to flank and an attack from sort of where you think the market is moving rather than where it is today. And, and then Trojan horse your way into it. If it's a brand new market, like smart homes, people have been trying to make a smart home for 30 years and, and like, it just hasn't happened. And we're in this era now with, with, um, IoT in the

• 1:12:03Ben Gilbert?

  home that, that it's, it's finally here. It's a reality. And this is the, the timing is exactly right to do it. And so if you're going to do it, then just aim right up the middle, create the center control point, you be the bundler and then, you know, then you own the ecosystem. And I think, uh, it's easy to say now by a couple of, you know, Pundits who do a podcast, but like the, the really hard to see at the time and, and Google did sort of this side entry strategy and you know, now is doing the Google Home thing for their, so they're going for the central, central control point, but years later, lost a lot of market share, lost a lot of ecosystem development. And in fact, Nest their own thing is integrating with, with their, their biggest competitor who's out ahead in the lead.

• 1:12:48David Rosenthal?

  Yeah. Yeah. Well, and I think, I think it's also like, all of the history and facts and you know, is instructive here that like, the way, if you're going for that, straight down the middle, the new operating system in a new market, you need the, like startups are not best equipped to do that. You need the resources of a big company. And I'm thinking like, back to Tony, when he was launching the iPod at, at Apple, like, the iPod worked because of iTunes and the iMac and it was part of the digital hub, right? The iPod in and of itself, there were plenty of startup MP3 player companies of all types, but like, Apple worked because it had the whole ecosystem and the operating system. And, and similarly,

• 1:13:31David Rosenthal?

  you know, with Amazon and, and Lady A, I won't, I won't set off your.

• 1:13:36Ben Gilbert?

  She's, she's off now.

• 1:13:38David Rosenthal?

  Nice. With Amazon and Alexa, you know, it was all of the divisions within Amazon that came together to build Alexa. I mean, one of, one of my, one of my best friends from undergrad was, was one, an early PM on Alexa and they were working on it for years before the first Echo shipped. And he came from AWS and a lot of the team, a lot of the early Alexa team and Echo team came from that part of the company, not to mention the Kindle and the devices, and then all of Amazon's whole ecosystem. It wasn't like, we're going to make a point product. It was from the beginning, like, you know, this is a, this is a computing ecosystem.

• 1:14:15Ben Gilbert?

  Yeah.

• 1:14:17David Rosenthal?

  And so like for, for Google and Facebook with Oculus to then buy these companies and leave them, you know, independent to me is like when you're, when this is the goal is, is not the right way to do it.

• 1:14:28Ben Gilbert?

  Yeah, David, I think that's a great point. I was trying to think of counter examples and listeners, maybe you can come up with some and email us [email protected]. I don't actually, I was going to make the point of like, what? Come on, startups can totally jumpstart an ecosystem. But a lot of times when you think about this, it is like the second or third innovation after a company already gets their foothold. It was when they, they start that ecosystem. You had a great point with, with the iPod. Even looking back with Microsoft, I mean, Windows was after they already had a strong foothold shipping DOS on IBM PC and variety of other PCs. Like it's, it's often the second or third swing is when you, you take a new ecosystem.

• 1:15:07David Rosenthal?

  When you build the platform. Yeah. And, and look at, look at Facebook and Google, which have certainly become platform companies in their own right, but their first products were, were, you know, network opportunities and, and network products really built on top of existing platforms, you know, on top of the web in both of their cases.

• 1:15:28Ben Gilbert?

  Yeah.

• 1:15:29David Rosenthal?

  And it was only then after they had that, that they then turned it into a platform.

• 1:15:33Ben Gilbert?

  Hmm. Hmm. And to, to put it into perspective too, how, how much getting this, this head start that Alexa got really gives them an advantage from, from Google Home. There was a 2017 report in, in September that there was about 20 million Echoes that had been sold versus about seven million Google Homes. Then over the holidays, Amazon announced there were tens of millions. So we should assume, you know, minimum 20 million sold over the holiday season. And so, you know, you're looking at, I don't know, 40 plus million compared to maybe 10 or 15. It's a pretty, you know, assuming they both keep growing on, on the same curve for a while. And, and, you know, Google doesn't do something

• 1:16:18Ben Gilbert?

  that is like totally a hundred percent better and causes people to switch or to, you know, forget about Alexa. It feels like a winner's been defined here. And particularly friends who went to CES this year said freaking everything had a works with Alexa badge on it.

• 1:16:35David Rosenthal?

  Well, even like, you know, your, your Lady A that keeps activating in the background, right? Like you've got it all in Sonos in your house, you know?

• 1:16:42Ben Gilbert?

  Well, yeah, the cool thing, so personally, I'm not willing to make the bet yet on like, it's funny how like Sonos lets you hedge because they are going to be rolling out Google Home. You can, you can flip it back and forth between the two ecosystems. So I haven't committed yet.

• 1:16:58David Rosenthal?

  Oh, interesting. I didn't realize.

• 1:17:00Ben Gilbert?

  Oh, yeah. Sonos has changed in their strategy. They decided to be Switzerland.

• 1:17:04David Rosenthal?

  Ah, interesting, but, but the Google Home on other devices isn't ready yet, right?

• 1:17:08Ben Gilbert?

  I don't think so. And, and AirPlay 2 isn't out yet either. So Sonos doesn't, will start bundling in AirPlay 2. I don't, I'm assuming not Siri, but we'll, we'll be able to work in Apple ecosystem a little bit.

• 1:17:19David Rosenthal?

  But it's interesting, like it's such an important head start for Amazon and Alexa, right? Like right now, they're the only game in town for third-party computing devices to use the assistant.

• 1:17:30Ben Gilbert?

  Totally, totally.

• 1:17:33David Rosenthal?

  Yeah. Interesting. All right. Well, I feel like related, you know, what would have happened otherwise is kind of in this camp. I think the interesting thing for me to, to think about is like, would any of what we just talked about have been different? In terms of category and strategy, if let's say that Sergey had gotten his way and acquired Nest in 2011, when it was still so young.

• 1:17:59Ben Gilbert?

  Yeah. And it didn't have a strong, well, I mean, it already, already had Fidel. It's not like it didn't have a strong culture of its own.

• 1:18:06David Rosenthal?

  But maybe then, maybe Tony and Matt would have become leaders within Google.

• 1:18:10Ben Gilbert?

  Yeah. Well, here's the thing is like, what, what we glanced over is like, the, the innovation for the home was voice, like hands down, that, that, that is the, that's the bundle point for the, the home.

• 1:18:24David Rosenthal?

  Yeah.

• 1:18:24Ben Gilbert?

  And Nest wasn't there, like Nest was doing this very cool, smart internet connected appliances thing. And they'll, you know, they're, let's say they developed 20 or 30 of those, like at what, how long would it have taken for Nest to realize? Oh, the center locus of control is putting a voice thing in the, in the middle of the home and Amazon figured that out. And of course, Google had Google Assistant on the phones and Siri existed on iPhones, but like, or actually it wasn't Google Assistant. It was, uh, whatever, the okay Google thing.

• 1:18:53Ben Gilbert?

  The, the, Amazon was really the one to realize that that's, that's how we win the home. And so I'm not sure that either acquiring Nest earlier or bundling Nest into Google instead of keeping it as its own thing earlier would have necessarily yielded Google producing the Google Home one or two years earlier.

• 1:19:14David Rosenthal?

  Yeah, although this is, I was just thinking about this and looking back on my notes to make sure I got the history right. If, if Google had acquired Nest in 2011, it would have been a very similar playbook to when they acquired Android in 2005. And Android, if we remember our history and facts correctly, when, when Andy Rubin was running it as a startup, the vision was not phones, but to be a Linux-based operating system for digital cameras, which sounds really similar here too, right?

• 1:19:44Ben Gilbert?

  That's right.

• 1:19:45David Rosenthal?

  They had the wrong, they had the right technology and the right, you know, market, but the wrong approach to it. And then it was within Google that it, you know, has got reshaped to become Android we know today.

• 1:19:57Ben Gilbert?

  These general magic guys are like 90% of the way there, but just need a form factor pivot.

• 1:20:02David Rosenthal?

  Clearly, none of them can exist as independent companies. I don't mean that as a dig, like they, they've done amazing things, but, but I think it's all part of the same theme though, right? Like when you're talking about building a platform, it's just so hard to do it as an independent company.

• 1:20:17Ben Gilbert?

  Hmm. Well, you know, at the very least, I would say buying it earlier, there's two ways that this could have gone better for Google. Buy it earlier so you pay less money for it and then you can execute a similar strategy. Or bundle it in with Google and just have one strategy and understand exactly what you're building and why, rather than, than sort of making a, a separate new business line bet on it.

• 1:20:43David Rosenthal?

  Yep.

• 1:20:44Ben Gilbert?

  I don't, I, the question I have no data on is like, what happens to Nest if Google doesn't buy them? And I, maybe, I mean, it would-

• 1:20:54David Rosenthal?

  Well, they were raising that big funding round, so they probably wouldn't have been able to continue.

• 1:20:58Ben Gilbert?

  Sure. But, but do they come out with an Alexa Google Home type thing? Like, do they, do they figure out how to be the ecosystem in your home? Or do they just become the best peripherals to integrate with someone else's ecosystem?

• 1:21:12David Rosenthal?

  It's hard to do without AWS or Google Cloud Engine on the backend because so much of the voice interaction is driven by the server side, you know?

• 1:21:22David Rosenthal?

  I don't know.

• 1:21:26Ben Gilbert?

  Tech themes?

• 1:21:26David Rosenthal?

  All right, tech themes, let's do it. Okay, so my first tech theme, which is just reminded me, this whole thing, as I was thinking about it, reminded me so much of is the famous, the famous quote, the Steve Jobs quote, which he stole from, I'm blanking, Ben, you're gonna remember, the guy he stole it from, but you know, if you really care about software, you care about hardware too. Yeah, the Alan Kay quote, you know, when you're talking about, when you're talking about computing platforms, like, it's not just software, it's not just hardware, it's not just services, it's all three altogether.

• 1:22:04David Rosenthal?

  And I think that's like, to my mind, a big thing that like, who knows if nested remained independent, if it could have gone after all that, but it was, it was too focused on just the hardware, you know, and not enough on the software, not enough on the services, and not enough on the ecosystem altogether.

• 1:22:21Ben Gilbert?

  Hmm, that's a, yeah, that's a great theme. And it's interesting, too, in the last couple of years, how it's become not just hardware and software, but hardware and services, or hardware, software and services. And I noticed,

• 1:22:34Ben Gilbert?

  you know, and services are effectively software, just running on a different, different piece of hardware than coming down to yours. But earlier, when I was saying, you know, Apple's business model is, is hardware that's differentiated by software, it's differentiated now by software and services. And it's so, you know, the game has changed and the table stakes are now all three of those when it was just the two, when Alan Kay came up with the quote.

• 1:22:57David Rosenthal?

  Yep, yep, that's my first one I got. And then, and then the other one, we've also talked about, but which is, you know, in some ways, I think you could listen to what we're saying here, and if you buy it, it could be discouraging for startups. But I think it's actually just more like a lesson about how to

• 1:23:16David Rosenthal?

  How to stair step as a startup, you know, to borrow another Ben Thompson term, which is that you can't start with the platform in mind, but you can start with a product and a product that has a network effect. And then you can use that to then in the next generation, bridge into the platform and you've seen this, I mean, again, this is how Google, this is how Facebook started. As you pointed out, this is really how Microsoft started too. You know, Apple as well, all of them.

• 1:23:43Ben Gilbert?

  Netflix couldn't start producing shows without having previously cheaply gotten all the rights to the other shows and before that have done the DVD distribution business to bootstrap the customer base. Like you, you, you need to do a, a network effect product first, and then you can have a, a platform that you can build on top or adjacent to it.

• 1:24:02David Rosenthal?

  Yep. And I'm, and I'm thinking again about Snap, right? Like, we haven't talked, talked about Snap in a while, but we can certainly argue, argue the, the degree of success here. But like, I think the strategy was right. Like Snapchat is a app with a very strong network effect. And then, you know, can they, they, they've built off that. And then can they, can they leverage that into becoming a broader platform? Like they tried with Spectacles unsuccessfully. But I still think there's something to what they're doing with AR versus what any of the other big platform companies are doing.

• 1:24:45David Rosenthal?

  You could argue that they are the most successful, you know, AR company out there right now. And, and will they be able to stair step up? So anyway.

• 1:24:59Ben Gilbert?

  Well, one for me was timing. I remember my, the first time I went and visited Microsoft before working there in, when did I go, 2010, 2011, seeing the smart home. And that was a thing that had existed for like years and years and years. And there was like always this promise of getting to the smart home, but many companies had failed at, at delivering on that over the years. And One thing I've been sort of thinking to myself is like, why now? Like, why is it actually coming to fruition now? Why are there Sonos with Alexa littered around my house? And, you know, I can unlock my front door with my phone. And what is it that finally made it hit a tipping point where it's a real market now?

• 1:25:44Ben Gilbert?

  And Nest nailed the timing. I mean, strategy be damned. Like, and maybe their strategy was just be the best peripherals and not on the ecosystem. But, you know, they really nailed it with, they were about six to 12 months ahead of when people really wanted this stuff, but they weren't five years ahead. And they're really starting to hit their stride, I think, with all the products that people want.

• 1:26:11Ben Gilbert?

  Like, I don't think people, like, people no longer move into a house and think, okay, I'm going to go get an ADT security system. Like, people now, for the first time, and I think we're still in the early adopter phase, but it's like, well, of course I'm going to get something that integrates with my, you know, whatever my ecosystem is. I'm not just going to go with the status quo thing.

• 1:26:35Ben Gilbert?

  So, I don't know. What do you think? Is it like, is it cloud computing? Is it, why now? Why today?

• 1:26:47David Rosenthal?

  Long silence. I don't know. I mean, this is why, I'm trying to think, in retrospect, I think we can look back on it and we can say sensors, we can say, certainly, the smartphone was a big part about that you can like, control your Nest from your smartphone and that existing.

• 1:27:10Ben Gilbert?

  Because you wouldn't have cared before that you could control it from anywhere else, because that anywhere else would have been like a website.

• 1:27:15David Rosenthal?

  Yep. And, and, and you know, I think one of the piece of the positioning and functionality that Nest got really right was this idea of being a learning smart home device, not a smart, smart home device. Like it, it learned from like when you were home and when you were not home and, and all that stuff. Um, so I think those are enabling factors, but I, but I also think like when, when Matt and Tony started working on this in 2010, nobody could have seen that. I mean, you, maybe you could have seen like the smartphone piece, but like, this is really like the, to me, what, um, what makes really great product oriented founders is that ability to take, take some seemingly disconnected pieces, assemble it together, just like Tony did in the six week consulting stint,

• 1:27:59David Rosenthal?

  you know, with Apple for the iPod and, and say, we can take these pieces, put it together. This is why the timing is right for now and why consumers will buy this. And it definitely worked. Like, I mean, they sold a lot of thermostats, you know? Um, and, uh, um, and I think it's like because of that vision.

• 1:28:17Ben Gilbert?

  Hmm. Hmm. That's a good point. Any other tech themes?

• 1:28:23David Rosenthal?

  Uh, that's, that's what I got for now, but I think that's, that's a good, a good segue into grading.

• 1:28:29Ben Gilbert?

  Yeah. I mean,

• 1:28:33Ben Gilbert?

  I'm so negative on this. Like, I don't know if anybody could tell. I think, um, it's a fine business. Uh, it wasn't the big play. They started doing the, the big play pretty late and internally and centrally. Uh, and they overpaid by a couple billion dollars for the small play. And it created a lot of turmoil and PR stuff and, you know, internal politicking. Like, I, I think this is a D.

• 1:29:05David Rosenthal?

  Yeah. Well, to me, thinking about grading, the biggest, uh, the biggest,

• 1:29:13David Rosenthal?

  Opportunity cost here associated with this whole saga was being really slow to respond to Alexa. And like, I'm sure, you know, when Google Home finally did come out and was done primarily through Google and whatnot, you know, I mean, end of 2016, like, wow, that's crazily, crazily, I mean, not as late as the HomePod, you know, which is both late and terrible. It sounds like, I mean, good sound, but like terrible as a voice assistant.

• 1:29:43Ben Gilbert?

  Hey, we'll see. We'll see.

• 1:29:46David Rosenthal?

  We'll see.

• 1:29:47Ben Gilbert?

  I mean, Apple has a different strategy than Google and Alexa have here. So I don't know if it's right or wrong, but I think it's, it's distinct enough where I don't think it should be what people are trying to make it out to be, which is like, Apple releases their exact competitor with these guys.

• 1:30:03David Rosenthal?

  Right, right, right. Fair enough. But still, I mean, HomePod aside, Apple doesn't have a credible competitor to, to Amazon in the smartphone, in the home either, you know, nor does Microsoft. Nobody does. So, but arguably, Google should have been.

• 1:30:18Ben Gilbert?

  Isn't there actually a Cortana piece of hardware? Like, there is actually some kind of thing. I just haven't.

• 1:30:24David Rosenthal?

  I said credible competitor.

• 1:30:28David Rosenthal?

  I'm sure Microsoft does have some sort of competitor. It's a competing product. But, but yeah, I think, you know, again, it's impossible to know, right? But like, to me, the biggest miss here is not the money they spent on Nest, is not the corporate drama, is not all this stuff. It's like, why did it take until November 2016 for, for Google Home to come out, you know?

• 1:30:51Ben Gilbert?

  Yeah.

• 1:30:53David Rosenthal?

  Yeah. So I, I think I'm sort of with you too on this one. Not because, I'm going to go agree with you on a D. Not because Nest is a terrible business. Not because Tony and Matt weren't super.

• 1:31:12Ben Gilbert?

  In fact, it's probably a good business. I mean.

• 1:31:14David Rosenthal?

  It's probably good business. And, and yeah, and like, the product innovation is great. And, you know, and I think they do have a really solid team there, as we've talked about. But like, it's not where Google needed to be competing.

• 1:31:30Ben Gilbert?

  Yeah. I mean, from a financial analysis perspective, like, I do wonder, it's probably higher than a D if you're like, if you just think about like, okay, in 20, if you, in $20, if you pay 2 point, or 3.2 billion for something, and presuming that their growth continues, like, when will that investment sort of pay back? And what will the, if you look at it like, on a 15, 20-year horizon, like, maybe it actually was a great investment. But I just think strategically for Google, uh, wrong bet.

• 1:32:00David Rosenthal?

  Yeah, a lot of wasted time. Um, all right. Well, there we are.

• 1:32:05Ben Gilbert?

  There we are.

• 1:32:07David Rosenthal?

  Nest.

• 1:32:07Ben Gilbert?

  Nest.

• 1:32:08David Rosenthal?

  In 90 minutes or less.

• 1:32:13David Rosenthal?

  Carvats?

• 1:32:13Ben Gilbert?

  Carvats. So, uh, I started listening to my new favorite podcast this week. It is called Do Buy Friday. And, uh,

• 1:32:21David Rosenthal?

  Ooh.

• 1:32:22Ben Gilbert?

  It is a weekly challenge show hosted by Merlin Mann, Alex Cox, and Max Temkin. And Alex Cox and Max Temkin are from Cards Against Humanity. And Merlin Mann is the famed author of the productivity blog back in the day, 43 Folders. He's on a bunch of the sort of, um, Gruber Talk Show type, type, uh, podcasts. He's Hot Dogs Ladies on Twitter. Uh, he's got another couple of shows. He's on a bunch of podcasts, but he's pedantic, quick, uh, brilliant, and, and like, is very, very into like productivity hacking and tools and stuff like that. And it's like, the, the podcast is hilarious. You, you'll get almost no utility value out of it. But it is like three very smart people who are

• 1:33:07Ben Gilbert?

  very quick, who are, uh, um, you know, just talking about like, a lot of the things that, uh, apparently make me light up. So, um, I, I highly recommend it if you like, uh, um, like, less serious versions of acquired with, uh, less, less content, less utility, but like, a lot, it's just three people who really enjoy each other's company. And it's really fun to listen to.

• 1:33:30David Rosenthal?

  We're not that serious here on Acquired.

• 1:33:32Ben Gilbert?

  No. We've gotten more serious, though. You listen to the early episodes, and you're like, did they even like, Google it? And?

• 1:33:41David Rosenthal?

  Yeah, now we're, yeah, at the opposite end of that spectrum. Well, give us some feedback in the Slack. Tell us what you think. That sounds awesome. Also, Merlin, man, what a great name.

• 1:33:51Ben Gilbert?

  Oh, yeah, it's an amazing name. He's got his vocabulary is as good as his names. Like you listen to it and you come up with like just awesome ways to express feelings that you didn't realize you had.

• 1:34:04David Rosenthal?

  Well, my carve out is a article by Mark Eric's in the California Sunday Magazine, which I didn't even know was a thing until I found this link. But this is an incredible piece of reporting. It's very, very long, but it's called A Kingdom From Dust. And it's about, it's about the farming industry in central California. And in particular, one farmer farming company, the Wonderful Company, which makes, I think about 65% of the world's almonds and pistachios

• 1:34:45David Rosenthal?

  and pomegranates, that like palm juice, remember, remember that stuff like they make that a bunch of other brands. And Halo, those little mini clementine oranges things.

• 1:34:57Ben Gilbert?

  Oh, yeah. You buy them by the little cardboard box.

• 1:34:59David Rosenthal?

  Yep, yep. They make those. And it's just this super, super in-depth piece about like the history, this, this couple, it's a husband and wife who owns it. They live in Beverly Hills. They had nothing to do with farming before they started buying up all this stuff. The environmental impact of everything, particularly through the drought in California. And like, it's insane, the amount of water that goes into, well, first off, central California is a desert. So all the water is, is either piped in from snowmelt or other parts of the state, or essentially mined from the aquifer below the earth. And the amount of water that goes into like one year's worth of, you know, almonds in the central valley

• 1:35:43David Rosenthal?

  could like be enough water for San Francisco for a decade. And, and yet like there's. So it's just this really good piece of like this husband and wife and company have done a lot of good things for the community there and a lot of philanthropy. So it's very ambiguous. I feel like the author set out to write a very negative piece and there are very negative aspects of it, but like it's a very nuanced balanced take. So really, really good, long read. If you're looking for something about California and history and water.

• 1:36:16Ben Gilbert?

  Wow. Cool. I'll have to check it out.

• 1:36:18David Rosenthal?

  Yeah. Well, I think that's all we got.

• 1:36:21Ben Gilbert?

  Yeah, I think, I think this might be our longest episode, but you know, a storied history at, at Apple, Google, Nest, and, and basically talking about sort of what is the next frontier? Like, what is the next multi, multi hundred billion dollar business? It deserves the time.

• 1:36:40David Rosenthal?

  Indeed. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 1:36:48Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:36:58David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:37:19Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system. So teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:37:31David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:37:42Ben Gilbert?

  Listeners, if you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. And if you feel so inclined, we would love a comment on Breaker. And thanks so much for, for trying new things with us and appreciate listening to the show.

• 1:37:57David Rosenthal?

  We'll see you next time.

• 1:37:57Ben Gilbert?

  See you next time.