Nest and Google’s Other Gambles

Just as the internet was dreaming up a Perfect Friday Story about Bernie Sanders skydiving into a California rally, Google parent company Alphabet quietly announced that a key executive would be stepping down. Nest CEO Tony Fadell, who helped build the iPod before launching his smart thermostat startup in 2010, will take on a new role as an adviser to Alphabet CEO Larry Page — that means a lot less managing and a whole lot more resting and vesting.

When Google bought Nest for $3.2 billion in 2014, it was the clearest sign yet that the tech giant’s business aspirations extended far beyond the search bar, and even past the mobile phone. Nest is the centerpiece in Google’s plan to take over the smart home of the future, transforming everyday appliances into smart digital devices that can suck up more data about our daily lives while also, in theory, improving them. Now, Fadell’s sudden departure has cast doubts on Nest’s future, as well as on Google’s overall ability to successfully diversify its business.

The reasons for Fadell mashing the eject button are, unsurprisingly, in dispute. He says he’s been planning an exit since late 2015 and wants to focus on the 100-plus startups he’s invested in over the years. But critical articles in The Information and Recode earlier this year alleged that Nest was missing sales targets and losing employees due to its harsh corporate culture. Greg Duffy, the former CEO of Dropcam, a home security startup that Nest acquired just months after joining Google, called Fadell a “tyrant bureaucrat,” according to The Information. He went so far as to simultaneously shade Fadell and his former boss Steve Jobs in a later Medium post, writing, “There is a lot that I could say about my extreme differences on management style with the current leadership at Nest, who seem to be fetishizing only the most superfluous and negative traits of their mentors.” Fadell’s response, in a nutshell: haters gonna hate. He also points out that Nest’s sales have increased at least 50 percent every year.

Though we love a Silicon Valley beef as much as the next tech blogger, it’s clear there are bigger issues at play at Alphabet. Google formed the holding company last August with two primary goals in mind: to provide more transparency about its finances for stockholders nervous about the company’s expensive moonshots, and to retain top talent to run its myriad businesses. On the financial front, Alphabet has been a big success because it’s now easier for investors to see just how lucrative Google’s core search business is. Wall Street propelled Alphabet to become the most-valuable publicly traded company in the world in February, briefly surpassing Apple.

On the leadership side, though, Alphabet has faced problems. No matter the official reasons, the optics of Fadell’s departure are poor and don’t inspire confidence in Nest’s future ability to release successful new products (while Nest refreshed its devices with new versions, the company introduced only one entirely new product line since the Google acquisition). At the same time, Alphabet’s robotics division has been in disarray ever since Android co-founder Andy Rubin decamped in 2014. This year Alphabet reportedly put Boston Dynamics, builder of the monstrous robotic cheetah from your nightmares, up for sale. And Verily (formerly Google Life Sciences), Alphabet’s health and medicine startup, has seen top talent depart due to clashes with CEO Andrew Conrad, according to the life sciences publication STAT, and has struggled to turn its big ideas into reality, with one critic calling them “not only science fiction, but beyond that — science fantasy.”

Ultimately, leadership drama that unfurls outside of Alphabet’s core Google products (think Search, Android, Chrome, YouTube) won’t substantially affect the company’s bottom line. In the first quarter of this year, Google proper generated more than $20 billion in revenue, while the company’s moonshots had just $166 million in sales.

So Larry and Sergey have some time to figure out just what kind of nine-headed hydra they want Alphabet to be. But eventually, the company’s going to have to prove that it can build another business that has the growth potential and visionary leadership to complement the most successful internet business of all time: Google.