Martin Spindler: On the NEST/Google deal

Source: "If you’re a casual observer of tech, you’ll no doubt have noticed that Google announced a rather large acquisition the other day. Heck, it even got prime time and first page news coverage here in Germany, albeit admittedly with the unavoidable spin towards matters of incursions of privacy. It seems this acquisition got people talking.
In my view there are three interesting discussions or inquiries into this acquisition. And although people seem to be totally intrigued about the potential motives of the purchase on Google’s part, I’m not going to wade into that territory.
 
I had a post sitting in my drafts folder which was picking up on this piece at Slate reporting on the financing round Nest was raising about two weeks ago.
 
But there’s a real reason why investors like weightless social media companies more than manufacturers of tangible products. It’s called “scale.” The next 100 million Facebook users will add very little to Facebook’s overall cost. But they’ll substantially increase the size of Facebook as an advertising platform. And these companies also benefit from network effects. […]
A company like this can, at the peak of its powers, achieve totally obscene profit margins. So you want to pay a lot for a firm that has even a small shot at that kind of ring.
 
The issues of scaling are of course there. Marginal costs in hardware businesses are not to be underestimated."
 


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