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Nest co-founder Tony Fadell, a former acolyte of Steve Jobs, explains how he invented a new thermostat and how his role changed after leaving One Infinite Loop

Tony Fadell: In his own words

Adam Lashinsky

JUNE 20, 2014, 10:30 AM EDT

Nest co-founder Tony Fadell, a former acolyte of Steve Jobs, explains how he invented a new thermostat and how his role changed after leaving One Infinite Loop.

Tony Fadell, a former Apple  AAPL -1.03%  executive who went on to co-found Nest (which recently sold to Google  GOOG 0.26%  for $3.2 billion), has been likened to Steve Jobs and Larry Page for his innovative thinking and disruptive technology.

Following our recent feature story about him in the June 30, 2014 issue of Fortune magazine—as well his recent appearance at the Fortune Brainstorm Green conference in Laguna Nigel, Calif.—here are some of his thoughts that didn’t make the magazine story.

Fortune: Tell me your ‘Aha! moment’ in starting Nest, with its first product being a thermostat.

Fadell: Well, first, I asked, was there a good product idea? And I thought, “Yeah, there’s a good product idea. Okay, there’s none out there. I can research everything on the web. There’s just nothing there.” So then I said, “Okay. Is it a good business? I know I can make this thing. Is it a good business?” And then I asked, “How many are being sold a year? What’s the total available market?”

And when I started doing the research, I was like, “Wait a second. There’s a quarter of a million thermostats in the U.S. alone? Well, if there’s that, what’s the replacement rate?” And I looked and it was over 10 million a year for just residential and light commercial thermostats. I was like, “Wait a second. 10 million? That’s more than game machines! That’s more than washers, dryers, stoves, and ovens. That’s a big market.” We’re dying to find big markets, right? So what else is out there? Bicycles are about the same. Now, people might not perceive it as such. It was just like when we were doing the iPod, people were like, “There’s no money in CD players. It’s commoditized. There’s nothing there. Move on!” The number of units is stagnant, and the price drops every year. That’s the kind of market that’s usually ripe for innovation.

So you had an idea you liked. Then what?

Then I looked at the competition, and I said, “Let’s look who can do what it takes to make this next-generation thermostat.” I went down all the current incumbents, and tried to look for startups that were doing it. And every time I looked, I was like, “Wait a second. If there was true innovation here, I would be seeing it.” It didn’t seem like there was any activity. And then I looked further and I learned that about 70% of thermostats were sold through wholesale. So they weren’t being designed for people to use. They were being designed for installers to install and sell as many as they possibly could. It had nothing to do about the consumer. And then I said, “Wait a second. There’s a market with an old way of thinking in terms of how the consumer learns about the product. The competition is old and hasn’t moved. And third, there’s no innovation whatsoever.”

It reminded me of when we were looking at the smartphone business. Sure, there was lots of competition, but they were being designed for the carriers to sell to the users, not what the users wanted. Then on top of that I said, “Is there a services business here?” So first, is the thermostat a good business? Then, can you supply services to the thermostat? And that’s when we get into the energy services. And I was like, “Okay. This totally reminds me of the MP3 player revolution and the smartphone revolution, where it first started with revolutionary hardware and software on the device. Then it quickly branched out to services and applications.”

At Apple, you weren’t responsible for marketing, but as CEO of Nest you knew that needed to be in your toolkit, right?

Let’s be clear. There’s product marketing, and then there’s marketing and communications. Product marketing, yeah, I was involved in all of that. Marketing and communications is a different thing, which is taking these clear tenets and the differentiation and all these other pieces and then turning them into marketing and messaging and pushing them out through the various print, digital outlets.

I would work very closely with product marketing, but again, product marketing didn’t know what could be created. So what I would try to do is be the linchpin between what the consumer wanted and what engineering could build, and always trying to stitch that together, trying to understand what the marketing differentiation would be, understanding what the ease-of-use would be or the consumer delight would be, as well as what could actually get done and done at a certain price point. Typically product marketing specs something and throws it over the wall to engineering. Engineering says, “I can’t.” And they redact it or take things out of it, put it back to product marketing, and product marketing says, “That’s all we could get.” I tried to take the fine line between the two to push marketing, saying, “No, we can do a little bit more here on the marketing side. Let’s get bold.” And to engineering, I’d say, “Let’s get bold. But let’s not get too bold that we’ve added so much risk to the project that it may never ship.”

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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