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Nest's Tony Fadell is stepping down, but the company has larger problems than its CEO

Web Summit Dublin - Day 2
Nest CEO Tony Fadell.
Stephen McCarthy/SPORTSFILE via Getty Images

A few years ago, Nest was widely viewed as one of Silicon Valley's brightest stars. Founded by Tony Fadell, a key figure in Apple's iPod team, Nest aimed to produce a line of user-friendly, connected home appliances. Given Fadell's Apple background and Nest's focus on hardware, many people wondered if Nest would become the new Apple.

But last Friday, Fadell announced he was stepping down as Nest's CEO after months of criticism for an erratic management style and slow growth at the company.

The company's first product, the Nest Learning Thermostat, got rave reviews when it was introduced in 2011. Nest added a smoke detector to its product line in 2013. Google was so impressed by the company that it paid $3.2 billion for it in 2014.

But since then, Nest has struggled. It acquired Dropcam in 2014 and rebranded Dropcam's flagship security camera as the Nest Cam in 2015. Beyond that, Nest hasn't introduced a single new hardware product, and it looks increasingly unlikely that it can justify that lofty acquisition price.

It's not surprising that Fadell is stepping down after years of disappointing performance. But Nest's problems go beyond the failings of any single CEO. The larger problem seems to be that consumers just don't seem that interested in buying a bunch of expensive "smart home" gadgets.

Critics say Nest is in chaos

Google To Buy Smart Thermostat Maker Nest For 3.2 Billion
Nest's first product was a connected thermostat.
Photo illustration by George Frey/Getty Images

The beginning of the end of Fadell's tenure as Nest CEO came in March, when the Information's Reed Albergotti published a scathing portrait of Fadell's leadership. Albergotti portrayed a company in chaos, with low morale and a stalled product road map. Albergotti placed much of the blame for Nest's poor performance on Fadell and his abrasive and erratic management style.

According to Albergotti, more than half of the 100 Dropcam employees Nest hired when it acquired the company two years before had left by March 2016. In this kind of situation, most CEOs would be diplomatic. Not Fadell. "A lot of the employees were not as good as we hoped," Fadell told Albergotti in an interview.

Fadell's comments infuriated Greg Duffy, a Dropcam co-founder who left Nest in 2015. In a scathing Medium post, he argued that half his team had left Nest because "they felt their ability to build great products being totally crushed."

"All of us have worked at big companies before, where it is harder to move fast," Duffy wrote. "But this is something different, as evidenced by the continued lack of output from the currently 1200-person team and its virtually unlimited budget."

Fadell's critics say that he is both too prone to micromanaging subordinates and too prone to changing his mind. As a result, Nest employees seem to be stuck in an endless cycle of product revisions, causing new releases to be delayed.

Of course, much of this could have been sour grapes from a disgruntled minority of engineers. But the fact that Nest's hundreds of employees hadn't produced a new product in more than two years certainly seemed like an ominous sign.

In a Tuesday email, Nest spokeswoman Ivy Choi disputed claims that Nest has suffered from slow growth and poor employee morale. "Since Nest began shipping products 4.5 years ago, Nest revenue has grown in excess of 50% year over year," she noted.

Choi added that the most recent version of the Nest thermostat — released in 2015 — sold a million units in half the time as the previous version, and she pointed to high marks the company has earned at the employment website Glassdoor.

Nest wants to build a suite of products that all work together

The New York Times New Work Summit - Day 1
Tony Fadell.
Photo by Kimberly White/Getty Images for New York Times

One reason for Nest's slow development of new hardware products is that Nest has been spending time making sure its products work together seamlessly with each other and with devices created by third parties.

There are now lots of internet-connected devices on the market, but a big problem with many of them is that they require too much effort to set up and manage. It's hard enough to convince someone that it's worth paying a premium for an internet-connected lightbulb or washing machine. It becomes an even harder sell if customers are required to separately configure devices from different companies.

Part of the value proposition for connected devices is their ability to work together — for example, to turn off all the lights in your house with a single tap on your smartphone. But this becomes more — rather than less — of a hassle if you have to open several different apps to turn off the lights.

Nest hopes to play a central role in solving this dilemma. Over the past couple of years, the company has convinced the manufacturers of a wide variety of products — from lightbulbs to washing machines — to participate in a program called "Works with Nest."

For example, you can configure internet-connected smart lightbulbs all over your house to flash when the Nest smoke detector detects a fire. Or if you have an internet-connected lock on your front door, you can program your thermostat to turn down the heat when you leave the house.

Building the software infrastructure to make all these devices work together takes more effort than merely building a suite of standalone products. But if Nest succeeds in establishing Works with Nest as an industry standard, it could give Nest a long-term competitive advantage.

It's not clear if people want a bunch of connected gadgets

These Whirlpool appliances work with Nest. It's not clear if consumers care.
Whirlpool

When I wrote a feature article on connected devices two years ago, I argued that these tiny devices represented the latest step in a long-term evolution of the computer industry. Every decade or two, there's a new generation of computing products that is dramatically smaller and cheaper than its predecessors. The washing-machine-size minicomputer of the 1960s was displaced by the desktop PC in the 1980s, which was replaced by the pocket-size smartphone in the 2000s.

Each new generation found a much larger market than the one that came before. The PC market dwarfed the earlier mainframe and minicomputer markets. Today the smartphone industry has eclipsed PCs.

Since the smartphone revolution a decade ago, computer chips have continued to get smaller and cheaper. You can now buy a thumbnail-size computer-on-a-chip, including wifi networking capabilities, for a fraction of the cost of a smartphone. It's a reasonable guess that these tiny chips could set off another round of disruptive innovation — and that this could set the stage for the next great computing platform.

But so far, there's not much sign of this actually happening. Wifi-connected lightbulbs, thermostats, crock pots, and smoke detectors have been on the market for several years now, and they don't seem to be generating anything like the level of enthusiasm or market demand that smartphones and PCs did in previous generations.

Nest's smart thermostat has some valuable features that pre-internet thermostats were missing. But they don't offer the kind of revolutionary capabilities that caused people to line up to buy an iPhone. We just don't interact with our thermostats that much, so there's only so much a better thermostat can do to improve our lives.

In other cases, like connected lightbulbs, the value proposition is even more opaque. It's possible to think of exotic circumstances in which someone would want their lightbulbs connected to the internet. But for most people, most of the time, old-fashioned lightbulbs work just fine.

Thermostats aren't like smartphones

The fact that consumers have so far greeted connected household devices with a yawn suggests that the Apple business model — the high-quality, high-margin model Nest is implicitly following with its own products — might not be the one that wins this market.

Apple and its competitors have been able to sell hundreds of millions of iPhones because it's obvious why it's useful to have an internet-connected computer in your pocket. People look at their smartphones dozens of times every day, so even small improvements to the user experience are worth paying a premium for. And progress has been so rapid that Apple has been able to sell a new iPhone to customers every two to three years.

Connected home devices don't seem to be like that at all. A smarter thermostat is nice, but normal people don't spend a lot of time interacting with their thermostats. So it's not obvious that they're going to be willing to pay a big premium for the one with the best interface. And people want to upgrade their thermostats every two or three decades, not every couple of years, so the number of devices you can sell every year is going to be much smaller.

All of that means that selling smart thermostats is likely to be much less lucrative than selling smartphones.

And smart thermostats are the best-case scenario. For other connected devices — like smart lightbulbs, crock pots, and washing machines — the benefits of an internet connection seem slight and the advantage of a highly polished user interface is slighter still. When shopping for a washing machine, people mostly care about how good it is at cleaning clothes. Few are going to be upset if it has a clunky user interface and can't be controlled with an app.

Smart devices could become a commodity

When you buy a crock pot, the user interface isn't your primary consideration.
Crock Pot

Of course, it would be silly to conclude that connected devices are never going to become mainstream. Eventually, wireless chips will become cheap enough that non-technology manufacturers can incorporate them into their products without significantly increasing the sale price — much in the way that small digital clocks are now routinely incorporated into toasters, microwaves, and other appliances. And standardized software platforms will allow them to build user-friendly connected devices with minimal engineering knowhow.

But that might not leave much room for a company like Nest, whose business model depends on people paying a premium to get the best available connected devices. People may only start buying these devices en masse when they become so cheap and user-friendly that customers don't have to think about the connected features.