Earlier this week, Google announced that 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 by Google to position the company 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’s 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. 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.” said Paul Dawes, executive vice president and general manager of iControl Networks’ security and telecommunications division. 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. 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.’”
Dawes believes that there will continue to be consolidation within the market as more big companies begin to realize what they’ve been missing out on in home automation and security. Additionally, Dawes expects this acquisition will result in increased competition in the market, especially on the hardware side of the business.
“A lot of the stuff that is happening today in the connected home market, including home security, is about taking the new sort of standards-based technology and breaking open the proprietary nature of the way security was done and the way connected devices were done and using open standards to do that, explained Dawes. “What I think you’ll see with some of the bigger players getting in, and also just in general where the market is going, is that we’re going to see a lot more standardization. We’re going to see a lot more competition in the hardware space, in particular, so that people can come in and build Android tablets or they can build ZigBee or Z-Wave sensors and devices and that is going to come a lot more to the forefront as these big players come in because they’re not going to want be a part of a proprietary, small industry thinking. They’re thinking big, they’re thinking IP, and they’re thinking how do you connect all of these devices together?”
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 and I think the most important to this is it’s a validation through another established company making a big bet in coming into this space,” said Warren. “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 and it gives them more flexibility to not have to be quite as profitable as early before money runs out, so I think that’s important from a competitive perspective.”
According to Warren, what will be interesting to watch is how Google approaches the market.
“I think that one of the really interesting potentials, and 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,” explained Warren. “Whether you’re talking about YouTube, Gmail or if you’re talking about 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, at least from a default perspective, 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,” said Kenny. “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 said that the potential customer base for home automation and security is going to increase dramatically. In fact, due to the influx of marketing dollars from these new players and the value they’re creating with their solutions, Dawes said 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. What we see happening is the move towards IP-based, the move towards interactivity and these combined value propositions of taking peace of mind and adding to it, the connectivity, the staying in touch proposition of the connected home, I think it’s going to really span the category and we’re already seeing that,” said Dawes. “We did a lot of research in 2008 to 2010 where we studied and we looked who would buy security and who wouldn’t and it was 25 percent who said they would and 75 percent said they wouldn’t. But when we brought in these connected home values, what we saw was an increase to 55 to 60 percent of households said, ‘wow, I’m really likely to buy that kind of solution,’ and that’s what we’re seeing today.”
Warren believes that 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 is a little bit different from an AT&T or a Comcast, but they all share some things in common,” said Warren. “They’re certainly deep-pocketed companies with strong brand recognition and the ability to go and influence lots of different folks across the country. Google, obviously, has less boots on the ground capability than an AT&T or Comcast does, but they do have a very deep bench in terms of innovation capabilities, development and cash.”
Eventually, Dawes believes that the advent of connected home devices and the entry of big conglomerates is going to change the face of the home security industry, much like what happened in the cable television market during the 1980s and telecom industry with deregulation.
“It’s going to fundamentally transform the home security industry,” said Dawes. “Right now, home security is really a very highly fragmented industry. The majority of the home security providers are very small, mom and pop-type of shops with small numbers of subscribers. I think you’re going to see a lot of consolidation in that industry. As these big brands come in, the only ones that are going to be able to compete are the people who have a brand and have a presence and are well-known.”
Warren added that the industry is continuing to evolve and that companies that only provide home security services are going to have to adapt if they want to survive.
“I think that it presents a real challenge to those who are in the legacy security industry and aren’t making as aggressive of a move into home automation,” he said. “While I don’t think it’s a death nail for traditional security, I do think that the potential size of the home automation market is certainly larger than it is just for residential security and it has the potential for security to become just a feature in a more complete offering, in which case those who are primarily offering security will have a harder and harder time competing over time.”
