THE BLOG

Why Antitrust Authorities Should Block Google's Takeover of Nest's 'Smart Home' Business

01/15/2014 12:23 pm ET | Updated Mar 17, 2014

This week, Google announced it was paying $3.2 billion to acquire the home appliance company Nest.  Home appliances might seem like an odd choice to be the second largest takeover target in Google's history, but is less surprising when you understand that Nest makes "smart appliances" like thermostats and smoke detectors that monitor people and how they use energy in their homes -- a treasure trove of data on personal behavior for a company with insatiable appetites for data. 

As Nest expands into other appliances, it has the potential to track when people wake up, energy use in each room, how much water they use in the shower, how much and what kinds of food is going in and out of the fridge, to name just a few examples.  As Wired details in a profile of Nest, what's impressive about its technology is that its devices talk to each other, and by "building an aggregate picture of human behavior, they anticipate what we want before even we know."

Imagine connecting that data into Google's already impressive tracking of its users' activities, from what they search for on Google Search to who they email through Gmail to what videos they watch on YouTube to their location as tracked by their Android smartphones.   This would add far more "offline" behavioral profiling to the comprehensive online profiling that Google already has on most Internet users.  As I detail in an article to be published this year at the Yale Law Journal on Regulation, Google already has a nearly unassailable monopoly in search advertising because of the integrated profiling of users that only it can deliver to its advertising customers.  Add in Nest data and that monopoly becomes just that much harder for any Google competitor without comparable troves of user data to challenge.

Which is why antitrust authorities should block the merger unless Google agrees to a legally binding agreement not to share any Nest user data with any other part of the company, particular its core search advertising engine.

To understand the antitrust issue, we need to recognize that Google is not some old-fashioned conglomerate with a search product, a YouTube video product, a Gmail product, an Android smartphone product.   In fact, Google doesn't make a dime selling those products to users; nearly all Google's revenue comes from one source, selling advertising to companies who buy those little links on search results and Gmail pages and a smaller amount selling display advertising on other sites.  All of its "products" are part of that core advertising engine, using user data to provide a greater ability for (and a higher price paid by) advertisers.

There is little question Google was an innovator with its original Page Rank search technology, but the company recognized early on that to build unassailable dominance, it needed to aggressively expand into new product sectors to collect more and more user data.  Each product sector gives it additional user data that means any competitor trying to take it on in its core search advertising services has little chance of succeeding -- and Google's Chief Scientist Peter Norvig admitted in an unguarded moment, "We don't have better algorithms than everyone else; we just have more data."

The antitrust problem with Google taking over Nest is not that it will give Nest an unfair advantage in dominating the home appliance sector; it's that it will give Google more data to reinforce its existing search advertising dominance.  Legally, the problem is more analogous to what the U.S. Court of Appeals said was the problem with Microsoft aggressively entering the Internet browser sector.  The goal for Microsoft was not to monopolize the browser market (the Court specifically declined to find a problem there), but that a strong presence in the browser market would prevent competitors from using the browser market to assist inroads into Microsoft's core operating system monopoly.  Similarly, by dominating sectors like smart home appliances with troves of user data, Google will deny potential competitors a base to mount a successful run against Google's search advertising service.

Google and the current head of Nest have blandly said they don't intend to share data from Nest's appliances with other Google services, but they've notably declined to promise never to share such data in the future.  Given Google's history of promising not to share data from Gmail with other services, then recently combining data from all its services from YouTube to Google Calendar into integrated profiles, such bland promises don't count for much.

One advantage from antitrust action against the merger is that the Federal Trade Commission or Justice Department can either try to block it or demand a legally binding agreement to ensure that Nest data is never shared with the rest of Google.  That would address both antitrust and individual privacy concerns.   Otherwise, it will be just one more block of user data adding to the monopoly wall protecting Google's search advertising service from competitive challenge.