Friday's announcement by Tony Fadell that he was leaving Nest shook the foundations of not only the smart home space, but the broader tech industry. And with good reason.
While I will probably write a longer post at some point looking at the long arc of Fadell's Nest story, for now I'll look at who Marwan Fawaz is and what his arrival means for Nest and the broader smart home space.
Be forewarned, this is a long post, but for those TLDR types, basically I will argue that this move marks a big change for Nest, possibly Google, and perhaps the biggest move we've seen in the smart home space to transition to what I believe will be a new era of monetization around a new consumer business model for paid services.
Fawaz, Big Cable And The Evolution of Home Security
Once everyone got past the initial shock of Tony Fadell's announcement he was leaving Nest, people soon started speculating about who exactly is Marwan Fawaz and what his past meant for the future of Nest.
The first thing you notice about Fawaz's resume is that he spent much of his career in Big Cable, first at two major cable MSOs and more recently as head of Motorola Mobility's Motorola Home division, which was the division responsible for the cable and telco TV and broadband infrastructure business.
So, what does cable and telco TV have to do with smart home? A lot, as it turns out, at least if you consider how many of the cable industry's most senior players have migrated over the past few years to the security and smart home business, and the biggest example of this move has been the huge push by ADT, the world's biggest home security (and arguably, managed smart home service provider) towards smart home and smart security services.
Following Cable's Lead
One thing you'll notice about Fawaz's recent career moves is that he's spent the last few years as a technology advisor to ADT. This is important and we'll speculate about what this role meant and how it could impact Nest, but first let's step back and look at the evolution of ADT in recent years.
A few years, ago, the senior management of ADT decided that they needed to modernize their technology and infrastructure. If you were to describe ADT's technology five years ago, the best two words to describe it would be proprietary and old. At some point the company saw some of the macro-shifts happening around more evolved IoT and smart home technology and began to work to change their underlying platform and prepare for the future.
The initial move in this direction could be traced back the launch of ADT's Pulse platform, the company's managed smart home offering, but in reality the Pulse platform was really a re-skinned version of IControl's smart home as as service platform. It wasn't until probably around 2014 that the company really decided to modernize their platform, which meant to develop their own core technology beyond what they had in their core security offering and the IControl white-label smart home platform.
One of the first moves towards their modernization effort was to hire some senior executives from the cable industry. Why the cable industry, this mature monopolistic business that many seem as fairly outdated in it's own right? Because despite the industry's legacy of seeming somewhat dated from a business model perspective, the industry has made significant progress over the past decade modernizing its platforms and transitioning towards a standards-based, IP centric infrastructure. At the center of that transition was CableLabs, the industry consortium responsible for the industry's move to interactive services.
Further, much like the security business, cable was is in the midst of a significant business model disruption by newer, more nimble market entrants in the form of over-the-top video, where low-cost providers such as Netflix, Roku and Amazon who saw an opportunity to attack a staid industry that had grown complacent in its own success. While one could argue that the traditional pay TV business still has a negative long-term outlook, it would be hard to argue they haven't actively been trying to modernize their technology and associated business models to deal with the threat over the past ten years.
The Modernization of ADT
So who better, if you're the largest home security service provider - in other words, the Comcast of the home security business - to modernize your technology and hatch up new business models than the same execs that had been working on doing that for the cable business.
And so that's what they did. Their first big hire from the cable world was Arthur Orduna, who had spent most of the previous five years prior to moving to ADT as the CTO for Canoe. Cable insiders will recognize Canoe as the cable industry's effort to modernize its ad delivery infrastructure. While Canoe's results can only be described as mixed, there's no doubt Canoe was running point on the transition towards dynamic ad insertion.
If you talk to anyone at ADT and in the security industry, they'll tell you that it's been Orduna that has been leading ADT's new efforts around smart security and smart home in recent years, and the first thing he did when he got to ADT was begin to build out a team of ex-cable and pay TV execs. This included Ryan Petty, a long time interactive TV entrepreneur, who was hired an as ADT VP of Product Development and Innovation, as well as Rob Beaver, who has the same title, who ran engineering for Advanced Digital Broadcast. Another exec added in 2014 was Bill Sheppard, who helped run the middleware portion of the cable industry's Tru2Way interactive cable platform.
So with all of this hiring, what's been the result of their efforts?
While ADT has continued to work with IControl and use the technology as the core of their smart home efforts, they've made significant improvements in modernizing their own technology architecture for home security, the most visible of which is their Canopy platform. Canopy, as many observed at CES in January, is everything that old ADT isn't. It's a modern, cloud-based API powered security as a service. And that's just the technology. It's the idea of Canopy, and the associated business model, that's the bigger departure for ADT.
What is Canopy's business model? In short, it's a security-as-a-service built for third party hardware manufacturers that want to offer home security services. Not only that, Canopy enables a company to build a security product and associated service that provides consumers with significantly increased flexibility around the commitment they make to a home security provider, meaning they can use a Canopy powered device like the LG Smart Security appliance without having to sign up for a costly home security equipment install and sign a two year contract. In other words, ADT's realized that the traditional home security market has only targeted about a quarter of the households in the US, and with a little more business model flexibility, they could possibly start to target a much bigger addressable market that includes renters, millennials and others who have traditionally been turned off by the old-school security model.
Which Brings Us To Marwan Fawaz
Admittedly that is a lot of context, but sometimes you need context to understand where things are going.
Now Fawaz was brought on as ADT's Technology Advisory Board Chair in March 2014, about the same time ADT had started to seriously revamp their product and technology roadmap. While most accounts of what's happened in ADT point to Orduna as driving their day-to-day innovation efforts, it's safe to assume that someone as senior as Fawaz, who ran one of the biggest cable infrastructure companies in Motorola Home and been CTO for two of the biggest cable MSOs in Charter and Adelphia, probably had a lot of input into the overall strategic direction of the company.
Still, after all that context, you're probably asking what exactly Fawaz's cable background and more recent efforts helping to shape ADT's future direction could impact his thinking with shaping the future for Nest. While it's probably impossible to say definitively what he will do, I think taking what we know about his background and some of the internal efforts in Nest in recent years to possibly create a new line of smart security products, we can hazard a few educated guesses about what's next for Nest.
Of course, one thing we should note is all of this is assuming that Fawaz wasn't brought on to sell Nest as some have suggested. I will do a follow up post analyzing that scenario, which is a very real possibility, but for the sake of analysis let's assume that Fawaz was brought on to save Nest and get them back on track. In that case, here's what we could likely see:
Nest Will Likely Launch A Line of Smart Security Products
There have been lots of rumors pointing to Nest, and more broadly Google, working on a modern variant of home security. First there were things like patent applications such as this one for a neighborhood security network that raised the possibility of Nest and Google looking at this market. There was also the acquisition of Dropcam, who had been working themselves on a smart security variant of their cameras that involved Bluetooth sensors. More recently, there were rumors about the company developing a security product, rumors that were tied somewhat directly to the increasing rumors of Tony Fadell's increasing management style issues.
Taken collectively, you could probably point to these stories and say with some level of confidence "where there's smoke, there's fire."
But, there's still the question of what these products would look like and what business model Nest/Google would employ in bringing them to market.
Data Isn't The New Oil. Paid Consumer Services Are The New Oil
Ever since I was at Gigaom, people would get up on stage at our Big Data conference and say "data is the new oil.". The point of these grand proclamations implied that data, whether that's data services targeted towards companies or consumers or whoever were going to be the way people monetized all of these connected devices in the future.
And to a certain extent, they are. I have no doubt that Nest, Google and many other companies will make lots of money on data insights and service models in the coming years. But I've always thought since I first heard this that if people think simply selling increasingly granular insights or even monetizing through more targeted advertising running on big data modeling was going to replace the $50 a month that consumers pay for cable, home security or whatever consumer service they spend a significant percentage of their paychecks on every month, the industry was in for a big wake up call.
And I think we're at the point where the industry is waking up to the fact that data, while a necessary core competency to run a modern services business, isn't the be-all, end-all when it comes to monetization around services and hardware for that matter. We've seen in to a certain degree with new connected hardware startups that have run into a hard time monetizing beyond their initial hardware sale, something that is becoming increasingly important as there is more and more competition in all varieties of consumer hardware be that lightbulbs, smart home hubs or connected locks. While not all smart home and connected device product manufacturers have fallen in love with the idea of data-as-monetization strategy, enough have had this model on their pitch decks with precious little about how to get consumers to pay them monthly recurring revenue.
Which brings us to Nest. I believe that Nest is on track to release some form of smart home security product with an associated service that they charge a monthly subscription for. Like Canopy and some of the newer DIY home security companies such as Simplisafe, I believe they'll probably offer a month-to-month subscription model with options for discounts for annual service plans, all at much lower prices than traditional security.
The actual hardware portion of this offering will likely include some sort of smart central hub with consumer-installable sensors to go on doors, windows and other parts of the home. The Information reported in March that their smart security product - code named Flinstone - would have a hub and sensors at the doors called Pinna and a presence sensor called Seshi. Whatever they bring out could resemble this, particularly if they are looking to offer a paid monitoring service.
In the end, I expect that Google would want to tie together some of the efforts they are making in voice recognition, cameras (with Dropcam/Nestcam) and even with Nest's other flagship products, the Nest learning thermostat or Nest Protect smoke alarm.
But What About That Cable Biz?
Still, you may be asking what does this all have to do with the cable business, ADT and Nest. Read on.
First, I think Mawaz's experience in reinventing a large traditional provider such as ADT for the modern security era could help significantly. As as I stated previously, the security market is in the middle of a significant transition, one in which cloud computing, smart home and IoT technology and data will play a big role. So from a technology standpoint, having been in the middle of applying those technologies to reshape the home security industry could be a big help at Nest with any smart security offering.
Also, the reality is the security industry is much more regulated than the consumer smart home business. While much of the regulatory framework for the industry centers professional installers, each jurisdiction often requires a license to run home security monitoring services, something that Fawaz (and possibly some of his lieutenants he could bring on) would know something about.
But the bigger picture implication is Google and Nest could shift towards a services model, one in which they either sell directly to consumers using a Nest security branding or, possibly, even begin to offer their own technology for local home security companies to use. Whether this takes the form of a Canopy like service for self-installable security appliances sold at retail, or an Alarm.com model that uses a "powered-by" business model for many of the more modern service providers like Frontpoint, it's yet to be seen.
And who knows, it could be all of the above. No matter what form Nest's security efforts take under Fawaz, I believe the model will rely on monthly subscriptions as the primary form of revenue, perhaps with some level of low-cost data driven ad-supported tier as an entry point.
So in that sense, we're probably still going to see Nest push data-centric monetization as an important part of its overall strategy, but only as a part of the businesses monetization, not the only part of it post-hardware sale.
This Transition Goes Beyond Nest
Earlier I talked about how I thought we are in the middle of an industry transition, one where smart home and consumer IoT companies begin to look beyond the hardware sale and data services as the primary forms of monetization. There's no doubt that there is a lot of discussion in the smart home industry right now about transitioning towards a service-centric model, one where there's a sustainable revenue stream beyond the initial hardware sale. This is of course necessary because, after all, all hardware businesses commoditize over time, and the promise of connected devices is the value they can derive through connectivity, not the connectivity itself.
It's somewhat easier for a company with a home security "angle" to make this transition - this is perhaps why the big cable and service providers chose home security as their entry point into the smart home, and why Nest would look at this business to make its segue into paid home services. However, monetization goes well beyond subscription services, something Amazon is showing with its Dash platform and August is attempting to create with its concierge services model.
Michael Wolf is the Chief Analyst for NextMarket Insights, where he advises smart home, home security and IoT companies on business models and strategy. Subscribe to his newsletter to get posts like this in your inbox. Also, check out the Smart Kitchen Summit.