The smart thermostat will sit in people's homes but its smarts will reside in the cloud. Since Nest is just the first step into a smart home that will have smart appliances, smart door locks and windows, the cloud will be needed to store all of that new information in the trend known as the Internet of Things.
"If you talk about a future where lights, doors, windows and appliances are all connected through a digital gateway, the thermostat is just one element, but it's a key element that can learn consumer behavior and adapt to it," Rebello said. "This is all a cloud strategy. If Google wants to be a player in this smart home market, it needs the cloud behind it."
Google's focus on the cloud is unlikely to waver, making it a long-term challenger to Amazon's cloud dominance.
Many people in IT say the future lies in the cloud. They're just trying to figure out how to get there, how fast to get there and which service they'll go with. That opens a big door for Google.
"I don't think we'll be looking at a company that's in the number one position steadily," said Kagan. "It'll be an ebb and flow. I would say Google and Amazon will be beating the heck out of each other."