Google's acquisition of Nest Labs could have a ripple effect throughout the home automation and security market.
Photo credit: (Photo courtesy Wikimedia Commons/Ardo191)
Google announced in January it will pay more than $3 billion to acquire Nest Labs, a maker of intelligent thermostats and smoke/carbon monoxide detectors. Analysts say the acquisition is an effort to position Google to offer products for the connected home market.
Although exactly what products Google and Nest Labs will develop for the market moving forward is anyone’s guess, the move could potentially have a ripple effect within the home automation and security market.
For several years now, a large number of traditional alarm dealers have been making inroads with homeowners across the country by selling security as part of an overall connected home package. It is also a major reason why many of the big cable and telecommunications providers, such as Comcast and AT&T, have decided to enter the market. With the entrance of Google, however, many people believe it proves the viability and growth potential of the market as a whole.
“I think (the acquisition) is a huge validation for the business opportunities here in this space,” says Paul Dawes, executive vice president and general manager of iControl Networks’ security and telecommunications division. “As we’ve seen this market really explode over the last couple of years with the launches of ADT Pulse, Comcast, Rogers, Time Warner, and Rogers and ADT in Canada, there’s been enormous growth in the industry.”
iControl’s home automation software is used in some of the industry’s most recognized alarm panel brands including Honeywell, DSC, UTC, and 2GIG. “We alone are managing 10 million-plus devices out there,” Dawes continues. “It has really gotten to a point where it has reached critical mass, so when you see something like this happen, it’s just a validation that a lot of the larger players who have been on the sidelines are saying, ‘hey this connected home space is important.’”
Jeremy Warren, vice president of innovation for Vivint, which provides home security, automation and energy management solutions to more than 800,000 customers across North America, agrees that this investment by Google in the connected home space is a validation of its growth potential.
“My first reaction is that it’s a validation through another established company making a big bet in coming into this space,” Warren says. “Nest was already an interesting competitor in the space, taking a sort of device-by-device approach and I think Google just makes them more formidable and stronger in terms of what their strategy had been. I imagine that this gives them more resources to accelerate the development of various devices.”
According to Warren, it will be interesting to watch how Google approaches the market. “Google in the past has generally used services that are new to them and industries that are new to them in order to get information about customers to drive better ad delivery because that’s really the way that they make money,” Warren explains. “Whether you are talking about YouTube, Gmail or Android, the main thrust has been pretty consistent in that the idea is to get information about users in order to be able to deliver better ads. I don’t think it’s unreasonable to think that that they would be interested in trying to do the same thing with home automation and home security.”
Jay Kenny, vice president of marketing for Alarm.com, says he’s also curious to see what types of innovations Google will drive in the industry. “Clearly, connected home technology is something that is going to be a mass market product that everyone will have,” Kenny says. “Obviously, Nest has made some beautiful pieces of hardware and received acclaim. It will be interesting to see how that partnership or integration with Google works. From our perspective, it’s exciting to see more validation of the market and also just interesting to see how these platforms are going to evolve.”
Given the recent entrance of cable and telecommunications providers to the market and now Google, Dawes says that the potential customer base for home automation and security is going to increase dramatically. In fact, Dawes says he envisions the market penetration rate for home security as a connected home solution increasing from 25 percent to somewhere in the area of between 45 and 50 percent down the road.
“What we see happening in the security market is it has been a good business with a very solid value proposition and very high recurring revenue on the order of $9 billion to $10 billion a year over the last couple of years,” Dawes says. “We (did research that) looked at who would buy security and who wouldn’t — and 25 percent said they would and 75 percent said they wouldn’t. When we brought in these connected home values, what we saw was an increase to 55 to 60 percent of households that said, ‘I’m likely to buy that kind of solution’ — and that’s what we’re seeing today.”
Warren believes the industry is still in the early stages of moving from home security into automation and that the most significant issue in the market currently is the building of new devices and getting them into the hands of consumers.“Google, obviously, has less boots on the ground capability than an AT&T or Comcast does,” he says, “but they do have a very deep bench in terms of innovation capabilities, development and cash.”
Eventually, Dawes believes connected home devices and the entry of big conglomerates will change the face of home security, much like in the cable television market during the 1980s and telecom industry with deregulation. “It’s going to fundamentally transform the home security industry,” Dawes says. “As these big brands come in, the only ones that are going to be able to compete are the people who have a brand, have a presence and are well-known.”
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