Nest CEO: New-school hardware startups still carry old-school baggage

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Session Name: Design to Ship, and Other Lessons on Developing Magical Experiences

Chris Albrecht
Tony Fadell
Om Malik

Chris Albrecht 00:02
It’s cooling. I’m going to bring out Om Malik again. He is the founder – my boss. He would be speaking with Tony Fadell, Founder and CEO of Nest Labs, Design to ship, and other lessons on developing magical experiences. Please welcome Om and Tony to the stage.

[applause] [music]
Tony Fadell 00:22
Is this thing–
Om Malik 00:23
Yeah. This thing is on.
Tony Fadell 00:25
Alright. Hi everybody.
Om Malik 00:27
Welcome back. I know you haven’t been on this stage for a while.
Tony Fadell 00:30
This stage, no. Your stage, yes.
Om Malik 00:33
Yes. This is the third time and I’m glad. But before we start talking, I think there’s a video we need to play.
Tony Fadell 00:39
Yeah. Let’s take a look.
Om Malik 00:40
Let’s just do that first. Come on guys.
Tony Fadell 00:44
Do we have audio?
Om Malik 00:45
Tony Fadell 00:46
There we go.

Video 01:21
Heads up. They’re smoke in the dining room. Smoke alarm hushed. Heads up. There’s smoke in the bedroom.

Video 01:49
Emergency. There’s smoke. In the living room.


Tony Fadell 02:17
Well, there you go. [applause] Thank you for clapping for a smoke alarm. Thank you. [laughter]
Om Malik 02:23
I need to say, I’m a little bombed out that you’re doing this now not when I was smoking because I will wake up the neighbors by my smoking. I would smoke so much, the alarm would go off. Now that I’ve quit I don’t really need it.
Tony Fadell 02:37
Well I’m glad you quit. Yeah. [laughter] I’m glad you quit.
Om Malik 02:39
Because I don’t cook. I don’t really cook at home so it’s like one of those things but really? Come on. You’re designing things which have been left unloved by a lot of people.
Tony Fadell 02:49
Since we were kids.
Om Malik 02:50
Tony Fadell 02:50
They’re same things as we were kids, right? Why? Exactly why? Look, your television has changed, your phones have changed, so many other parts of your house have changed. Why don’t these simple things that are so important that the government tells you, you have to put in your home. You have to put it in your home.
Om Malik 03:08
Do you have that nine volts battery in it?
Tony Fadell 03:12
I have nine volt. It has a double As. The wired one and the battery one have double A lithium battery.
Om Malik 03:18
The 9V battery has one additional use. If you put it on your tongue–
Tony Fadell 03:23
You get a little shock, right?
Om Malik 03:24
Yeah. It’s like we can’t do that with Nest, can you? [laughter] See. I’ve found one feature you haven’t been built it. [laughter] They don’t call me a critical critic just for that you know. Anyway, let’s talk about–
Tony Fadell 03:38
Thanks for the Nest blue socks. I like them.
Om Malik 03:40
This is the GigaOM and all. I sent out memo to every speaker, you have to wear – you’re not wearing it.
Tony Fadell 03:46
I didn’t hear that. I’m sorry.
Om Malik 03:48
It was sent out on Saturday just to make sure. But clearly, you don’t your email. [laughter] What? You must be on Apple mail or something. [laughter]
Tony Fadell 03:58
No. If you would’ve tweeted it out then I would have seen it.
Om Malik 04:00
Yeah. Right. That’s going to work out. No. Let’s get an update from you on the company. What’s been going on since you were at our roadmap last year?
Tony Fadell 04:14
Well, we’ve been basically a new brand for less than two years now, right? So just about the end of October, right about this time, we started shipping the first Nest thermostat – learning thermostat. And so, for us in just this these two short years to actually have a brand and people are going we’re the, this is a new start for the Nest– to us that’s incredibly respectful and we can’t even believe that people are saying that for a company that’s just been around for so short of a time. For us, that’s a great, great momentum but now that we’re in 5,000 retail stores in just North America and we’re getting attraction with utility partners all around and people getting free Nest thermostats and getting rebates on their Nests and getting paid to use our Nest correctly, I think all that in just two short years has been a lot of work. And now we added this so we’re up to almost 300 people and we’re now moving over and we announced that we’re already going to have protector – Nest Protector in UK. We’re growing our product lines, we’re growing our regions that we’re going to and all in just two short years so it’s been exhausting and has been incredibly fun.
Om Malik 05:28
What do you think you’re going to redesign next? [laughter]
Tony Fadell 05:31
What are we to redesign next? Well, the first thing we have to do is we have to get our thermostat over to Europe, right? Because we’re in over 90, I think we’re over 96 countries where we don’t sell our products today. We don’t even shift them. And so, what we have to do is we have to– when we’re learning all about the European market and they use heating and cooling very differently over there than they do here in North America. We’re in big redesign right now to figure out how to bring the thermostat there.
Om Malik 05:59
Right. What about the locks? If you go and Kickstarter there’s this mode locks being created on Kickstarter than–
Tony Fadell 06:06
There’s a lot of things on Kickstarter.
Om Malik 06:07
What do you think about the locks thing, would you do locks ever?
Tony Fadell 06:11
Well, at the end of the day, if you look at this, the product like the thermostat and Nest Protect smoke in Co1, you have to have us. People have to have, more or less, have to have a thermostat but they have to have this. Electronic lock is not a have to have thing. Lots of work today and it’s not necessary that they are absolutely connected. I like to go for things you basically have to have. People say, “Whoa. Why don’t you do sprinklers? Why don’t you do this?” You know, some are rich man’s problems. Some are everyday problems.
Om Malik 06:45
To do the rich man’s products too.
Tony Fadell 06:48
But you have to buy one.
Om Malik 06:49
Tony Fadell 06:50
You can either buy one that goes, “Beep.” Or you can buy one that’s actually is might be thoughtfully designed that might keep your family safe.
Om Malik 06:56
And I’d play Justin Bieber as a smoke alarm. [laughter]

Om Malik 07:02
That’s a product idea right there. Like ring tones for smoke alarms. [laughter] I will take 15% for that.
Tony Fadell 07:10
Unfortunately, the regulators don’t like that. We have to follow some real strict rules.
Om Malik 07:16
Regulators, did you not you not know Silicon Valley is a city from America now?
Tony Fadell 07:20
Yeah. We’re going to be our own country.
Om Malik 07:21
Yeah. VIP. We’ll sell to each other–
Tony Fadell 07:23
It’s worked really well for Quebec.
Om Malik 07:24
Yeah. [chuckles] I’m not so sure about that. [laughter] Really. But you know one other unloved product which I think all of us would love to see somebody redesign it, the garage door opener. I think that is just the most insane product ever.
Tony Fadell 07:41
Is this whole session about all the things that Nest can build for Om?
Om Malik 07:46
Yeah. Pretty much.
Tony Fadell 07:47
To fix his home? Okay. I’m writing it down now.
Om Malik 07:49
There is an upside for having my name and the company’s name, right? [laughter] So it’s like I can ask the things that I want, right? [laughter] Alright.
Tony Fadell 07:58
At least I have one customer now.
Om Malik 08:00
It’s a good customer. I have like a million plus followers, I can tweet about what I just want from that. [laughter] Jokes aside. Seriously, let’s talk about like there is a renaissance in hardware and a lot of people are building hardware and new kind of devices. What do you make of this creative energy which has been unleashed about not just in the valley, but worldwide, what’s you take on it?
Tony Fadell 08:25
I look at it very much similar to apps, right? Applications and when the iPhone’s first shipped and then the developer program came out then everyone was enabled to build their own apps. And if you look at hardware now, the kind of the Lego blocks of hardware whether it’s our do we know or raspberry pie or these other things and people are starting to bolt things together. If you look at a lot of these things, there’s a lot of bolt together things. And I’m really interested and it’s really intriguing because when I was a kid growing up I had to go and call Motorola and say, “Please, can you give me a processor?” And build my own stuff. I had to literally go and go to warehouses and go get these things. So it’s great that people have this democratize access to hardware as much as they do software that’s great. But the thing at the end of the day is, you’re going to learn through that but to actually ship a product that is in either in online or in retail with customer support and with all the designed things and all the apps that need to go with it and the services. You know, it takes a really big infrastructure to pull that off. And it’s not a small – it’s typically not a small start up if you can do it, and you need a lot of funding because today, rightly or wrongly, VC has all been so focused on apps and have been saying, “Okay. What’s your attraction? Watch your eyeballs. How many people have you gathered in this short period of time and maybe I’ll fund you. You do it all on your own and die. When you do something where its atoms based not electrons based, you need money to do that, and you need to get all kinds of things well sorted out before you actually ship your product to a customer, right? Because they need to feel that experience and so, that takes a lot of money and to me, right now, Kickstarter is a way of funding that. If you don’t really have that kind of budget you need to be able to create that hardware. If we saw the first generations of various Kickstarter projects or any Gogo or whatever, they’re kind of beta. If they– right in the half they can work it out. And so you need a lot more time, you need a lot more money to get it right the first time. I’m very encouraged by what I see. And I love to see those products coming to light and I’m a purchaser of a lot because I just like to try things out. But to see them to go mass, I think just like any application going mass and getting paid for it, the same thing’s going to happen with these. There’s going to be a couple of key outstanding ones that are going to make it big but a lot of them are not. And that’s just the way of the world.
Om Malik 10:56
So what does it take to win? Just the money or like this different kind of thinking for the product to– I mean, you’ve been selling the thermostat for a while now and so what is that you’ve learned from that experience? Is it just money or is it more than that?
Tony Fadell 11:12
Well, no. It’s all of those things. Money is one of the basic things you need but you also have to have process, you have to have people who understand manufacturing and they have to understand how do you actually ship the thing with the level of quality that you know you’re not going to end up with the hardware back at your doorstep and reliability testing, drop testing, and EMC and all of these other things that you don’t have to do with apps. So you have a whole set of people who are experts in all of these areas and there’s different regulations like our Nest Protect. We have to worry about different certifications in the US versus Canada, versus the UK and you need experts on the stuff. So, when you look at these things, you need all of those things in addition to the differentiated part of the project, right? So if you’re shipping something, you have to differentiate, we have to look at the design. But if you don’t have all of these other pieces, you can’t ship the product of if you do, you’re all going to do it to a very small set of people.
Om Malik 12:08
How are things different from the early days when you were working on iPod and the word technology then and ten years later where we are today, how are things different in your perspective?
Tony Fadell 12:21
Well, nowadays, if you look at what we’re really doing at Nest, right? We’re a consumer products company, but to make that product, the product is a summation of the hardware, the software on the product, the services’ back-end and all the different apps you need for IOS android, web apps, tablets, and all the different screen size and everything else. So this is big set of things to get the one product that you see just the Nest protect, right? You just see this Nest Protect, but all the other things you need. When you saw the iPod, there were very few things you needed back then. You didn’t need all of those mobile apps, you didn’t need a store, you didn’t need service parse, so it’s to me, it’s gotten even more complicated and more moving pieces and parts to bring together because now all of a sudden if you don’t have your android app people get upset, and if you don’t have your IOS app, and if it’s not optimized for the latest Samsung Galaxy-Bla or the latest Apple S version, people are complaining all over Twitter, all that stuff. Now we have Twitter too, right? We didn’t have that back in 2001. So we’re here for customers all the time. We have so many piece of the puzzle to put together that it’s just a lot more work than the original just 10 years or 13 years ago.
Om Malik 13:40
You know, I just– just to kind of take a step back. Apple always started with building a great hardware and then layered software experiences on top of it but mostly in tandem with it, now if you have to build a great experience, what do you need to? Do you start with hardware? Do you start software? Do you start with the service? What should be the bigger thing of our products now?
Tony Fadell 14:05
Well it depends on what you’re really trying to do. For us, it’s really a top to bottom. You have to optimize all along the chain. Because you could have a great device that’s uploading a ton of data but then your data stored becomes really, really large and very expensive. And we’re not charging for service with each of these products. So you got to make sure you keep that data really, really tight and really short because you can’t afford to do this for 10 years or what have you for free. You have to look at the cost of the device, it has to build in the cost of the service already in and how much data you’re moving, then you have to look at the cost of maintaining the apps over many, many years because you’re not going to get people to pay for apps to talk to the hardware that they already have because you are vertically in a great business. All of those things all come into play when you design the next generation product or the next generation business. You have to think about all of those things. A lot of people say, “I’ll worry about later.” “I’ll build an app company now and I’ll worry about revenue later.” I’m an old school guy. I kind of like to understand where my revenue is going, how I’m going to get to profitability at sooner or later. Because sooner or later, the money does run out. The VCs aren’t going just keep funding and cash into a business. You’re going to have to show you have a true revenue. I’d like to– I’m old school.
Om Malik 15:26
Have you heard of this thing called Snapchat? [laughter] It’s worth $4 billion.
Tony Fadell 15:30
Om Malik 15:31
Tony Fadell 15:31
Wow. How do I get in that gig?
Om Malik 15:34
I don’t know man. You’re not too old for that stuff. [laughter] I like money so I’m okay with cash and revenue–
Tony Fadell 15:41
There’s something really basic about you. Pay for this. You know who to call when there’s a problem.
Om Malik 15:48
Talking about the problems. One of the problems I find grappling with this is this product somehow don’t feel network aware whether it’s Apple, even some of the other product, they’re not– they don’t really– they were not built to use the network, they are still being built the old fashion way. The way network is, it’s just an augmented brain of a device and we still don’t think about devices in sense. Why is that?
Tony Fadell 16:21
Well I think it’s the same way we look at web 1.0, right? When web 1.0 came out, you saw a bunch of people connecting things and it was like a virtual magazines. It’s just the same content and it had may be hyperlinks but that was it. It was kind of the same format. People didn’t really embrace it. They said, “Oh. It’s a digital version of XYZ.” Right? Or when it was digital versions of songs and then Spotify came along and showed a whole different way of doing it. So I think it takes time for people to embrace connectivity, understand and break out of their models because they’re like, “Where’s my new revenue coming from?” They know what they are and they’re trying to protect as well. They have to understand and embrace it and it takes time to adopt. So if I look at things like 1.0 internet of things like refrigerators are being connected – you probably saw this last year or the year before. You saw refrigerators with tablets on them like, nearly tablets and they’re like, “This is the refrigerator of the future.” And I’m like, “Why do I need a tablet on a freaking refrigerator?” What? I need another tablet to have to manage and all the software downloads for what reason like why is that any better? So what you find is most people just jamming things together because that’s the fastest thing. They don’t rethink the experience from top to bottom. And that’s what happened with web 1.0 and then when we rethought it for web 2.0, and then we rethought it again for apps and how it’s done, you’re seeing much more embracing of the different technologies that you can get from those things and changing the experiences. It’s about experiences. It’s not just about connecting it. Just because it can be connected, doesn’t mean it should be re-invented with connection. Very, very different way of thinking.
Om Malik 18:04
That’s a very vital point and then which lead me to the question of you are constantly talking about magical moments and do these experiences lead to magical moments like how does this all work out?
Tony Fadell 18:25
At the beginning, when you’re starting to do product design like we did with the thermostat or even Nest Protect, you start with the right balance of rational and emotional features. So think of– If you’ve read the book by Daniel Kahneman, Thinking Fast and Slow. That’s system one and system two thinking. It’s really one part is rational thinking or logical thinking and the other one is emotional thinking or gut instinct kind of thinking and you have to blend those in your product when you come out. And so those magical moments that you speak of, you’re trying to find a couple of those things as well as the rational pieces to get people to want to purchase. So if you look at something like the thermostat and the interface, or you look at Nest Protect and how it speaks to you and path-like functionality. Those things were really thought through at the beginning when we were doing the product. But then, fast forward just a year or a year and a half ago, when we were starting to design our energy services, we started seeing all kinds of data coming through the thermostat and we started learning what people– some people are really– how they’re interacting with it. And we understood that we could also start to save more money by doing certain things. And by doing that, we’ve created more magical moments and gave that to them in software update for free and marketed and what have you. Again, you’re always looking because I believe connect to products like these are not like cell phones. They’re going to be replaced every 18 months or what have you. They’re going to be in your room much, much longer, multiple years, seven to ten years, that kind of a thing. And when you have that, you have to think about creating magical moments during that entire lifetime and you’re always minding the day that you’ve seen customer usage patterns, you’re seeing other ways because it’s not just a thermostat and it’s not a smoke alarm. It’s about the time you put that product on the wall to the time you replace it many, many years later. We want people if they use it right, if they use the thermostat correctly, they get paid for their experience. And they never even thought they were going to get paid when I first– but we have tens of thousands of customers. Now who are getting paid when they use the thermostat? Because our utilities aren’t sending them to use it correctly. So that to me is another magical moment that again, is something that build and re-enforce the brain message that we’re to create magical moments for you. You may not know it at day one but we’re there to do it subsequently.
Om Malik 20:50
Okay. In your case. It’s pretty clear value proposition. There is a product that needs a service. There is a service of– because the utilities have a deep desire to be more optimized. They will give you–
Tony Fadell 21:04
They don’t have a deep; some don’t have a deep desire for you to use less energy.
Om Malik 21:08
Okay. [laughter] There is an imperative there, I’m like, “How do you create magical moments in a service which is not as much a utility which is more like of a– it’s just there. Let’s say something like a photo apps for instance, what is the–
Tony Fadell 21:29
Well, look what happened to Instagram, they added the filters. It was to me, you know when you first tried Instagram and you saw filters, it was a social network, social graph plus photos, okay, understood that. But they added that filters effect and that was like, “Wow.” And then everybody copied that over time. But that was that ‘wow’ effect for how it got started. Right. So you have to have something that just gets people go “Oh.” think about the day-to-day things like here’s a photo, here’s a photo, here’s a photo, here’s a photo with filters. Here’s a smoke alarm with– that talks to you and actually gives you an information that beeps. Those are the kind of things where people like, “Oh, yeah. I got it.” They kind of go, “Yeah. I’ve always had that problem.” Or some new way that they never thought that they could have used it and it makes them feel more creative or it’s a dress to prom they’ve had for decades in their life and so on.
Om Malik 22:20
Right. So before we go, I have one question for you. You started a company at two different times, one in the early 2000 and now in the new century in like 2010. So what is different for you now?
Tony Fadell 22:42
For me personally? Well, back in– it was in ’98 or ’99 when I started the company I had some before that as well. It’s very different for me because today, I can go out and people are asking to give me money. “Can I give you money?” Back in ’99, it was like and I was doing hard work back then, they were like, “I don’t want to hear anything to do with hardware. I don’t want– Give me software, give me eyeballs, just web 1.0 kinds of stuff.” And so, between people just wanting to give you money because you have some credibility and the other one is just the network effects of, you know, you’ve been around longer, you’ve met more people, more people want to join and help. So for me, I’ve just had a lot of experience and a lot– I’m old. I’m not a 20 something kind of guy. But being a 20 something, there’s so many more avenues to reach out to people, to learn about VCs and how things are funded, to learn about competition. It is and you have things like in the Gogo or Kickstarter or something like that. There’s so many more opportunities. And I think it’s great for people to go and be entrepreneurs or try to be entrepreneurs, absolutely. But I’d also recommend and like similar to what I did is go work with your heroes for one or two years who’ve actually done it before or who understand the processes, understand all the pieces, not just the magical little differentiator that might be cool for your product but also how you get it done and how you get it done in a repeatable fashion and how to build a team. So for me, I was able to work with my heroes back in the day. Today, now it’s even easier to go work with your heroes. I would definitely try tell people to go seek those people out, go work with them so that they can find the path and learn how to make sure they feel confident when they start their first venture that they’re ready to go.
Om Malik 24:36
Great. Thank you Tony for coming back and hopefully we will have you next year to learn more.
Tony Fadell 24:39
Thank you. And we got one other thing, right?
Om Malik 24:43
One more thing.
Tony Fadell 24:44
We’ve got a surprise.
Om Malik 24:45
Yeah. So when you go out, there is a Nest truck which will show you how the Protect works, right?
Tony Fadell 24:52
Exactly. If you go outside, we hadn’t shown it to anyone. We brought it right for this audience first time. So what happens when you combine a Nest Protect with a fire truck with West Coast Customs – they’re one of the big– the one auto-detailers. We have it outside. Check it out.
Om Malik 25:09
Alright. Thank you tony.
Tony Fadell 25:11
Thanks everybody.
Om Malik 25:12
Thank you. [applause] [music]
Chris Albrecht 25:17
Thank you Om. Thank you Tony. And now it’s time for your own magical moment. Go eat some lunch. Check out the GigaOM mapping sessions screening room level two in the main room. Lunch is in the expo area. Nest firetruck GigaOM research table. General sessions resumes at 1:35. Thanks everybody. [music]