The Sky Is Not Falling In Smart Home And Here's Why

Last week I wrote about why I thought the smart home market was in for a shakeout. The piece focused on some of the recent venture-funded startups in the space facing choppy waters and how some early efforts in smart home retail are seeing lackluster demand despite the significant amount of space they've allocated for their "smart home" sections.

For those of you who think this is something unique to the smart home space, here's the reality: every new consumer technology market faces market challenges. Like the mobile computing and connected entertainment markets of the last decade or the 3D printing and wearables products of today, markets go through stops and starts as they search for form factors, use-cases and service platforms that capture the consumer's imagination.  The end result of a market still feeling its way is many the companies in the space will not make it. That's not all that surprising since we know 75% of venture funded startups eventually fail.

Since I wrote my piece, there's been a wave of articles expressing new doubt about the smart home category. Many of the articles and reports from the new-wave of smart home doubters centered around a report from Argus Insights that said consumer demand for smart home products has dropped off. The Argus report used a combination of product reviews and social signals to reach this determination, and while I'm not entirely certain of Argus's methodology, I think the general determination that consumer demand for the generalized "smart home" is soft is correct in whole, mostly because consumers don't understand the concept of smart home.

But what many of those now claiming the sky is falling in smart home get wrong is the belief that demand for all categories have dropped. This isn't the case. Consumers are buying those products they understand and doing so in ever-increasing numbers, products with clear value propositions like smart locks, smart lighting and wireless cameras.  

But perhaps more importantly, one aspect I think many of the new skeptics miss about this stage of the smart home market trajectory is many of the early installs of smart home gear are actually service-provider managed rather than self-installed. Traditional broadband providers like Comcast, Time Warner and AT&T are seeing robust growth for their smart security service offerings, packages which usually pair managed security monitoring with smart home products like wireless cameras, motion detectors and access control.  Other new-model security service providers like Frontpoint and Vivint are also growing rapidly, using interesting new sales approaches and install models.

And it's not just security services where service providers are beginning to step in. Nest and Honeywell are doing deals with utilities, many of which will begin to offer smart thermostats as part of their offerings to enable consumers to better manage and monitor their consumption. Insurance companies, which have business models that are similar to service providers in many respects, are beginning to offer discounts for consumers who use smart home technologies like leak detectors.  It probably isn't long before water utilities incentivize consumers and maybe even eventually are required in drought-plagued states like California to use smart water and irrigation monitoring technologies.

In some ways this step in the smart home market evolution isn't unlike that of the first wave of the connected home market which eventually hit a natural limit of of those who were willing to go to a store and buy a home router and network cards and install them themselves. The first-wave of the connected home eventually saw a significant growth stage centered around service provider managed home networks, as large MSOs and telcos began to offer home gateway devices (modems with Wi-Fi/router technology) that resulted in significant growth in home networks. 

Looking specifically at DIY retail, I think the difficulties some retailers is due to a land-grab approach which involved dedicating a significant amount of shelf space to products that were largely unproven and needed a significant amount of consumer education. Some, like Lowe's, chose to create its own hub-centric platform when, at this point in the nascent smart home space, it's unclear whether consumers en masse are willing to invest in a new product category when they're unsure of the benefits.

Other sales channels, like Amazon, are seeing strong and growing demand for certain smart home products. Locks, lights and cameras are all doing well. But like Best Buy and others who stock lots of SKUs, Amazon is seeing less demand for those products which consumers don't see an immediate and tangible benefit for. 

Unlike brick and mortar retailers, Amazon has the benefit of an "infinite" shelf, where stocking a product largely means listing it in its home automation section of its website and not having to worry about expensive and valuable physical store retail space. When Best Buy and Lowes make early bets that mean displacing something else on its finite physical retail space, they're more than likely to be disappointed if those aisles don't immediately translate to comparable or even more dollars on per-foot basis as what they replaced.

All that said, while a company like Amazon is interested in smart home because it sees a variety of new products to sell, its strategic interest in the space is more of a result around new business models that connected devices will eventually unlock. Dash Replenishment services, Amazon Home Services, and home assistant-driven commerce through devices like the Echo are probably the reasons some like Jeff Bezos would get excited about the category and why the company will continue to invest in the space.

In the end, some of the market failings of early companies simply come down to choices made by the companies themselves. Quirky has ran itself like it was a company with tens of millions of dollars in revenue, when in reality it was a startup trying to create a market for new products.  That it's facing problems now, particularly after something as devastating as a product recall, is not that surprising in retrospect.  Leeo, after getting a significant funding round, overhired and is now cutting back to give itself more runway and preserve cash.

The folks at the Internet of Things consortium had a piece about creating a sustainable smart home market, and I think they're on to something. Much of the eventual success in this market will come when companies figure out the appropriate business models, break down barriers between walled gardens and ecosystems, and begin to tell the story a little better about tangible benefits a smart home can bring a consumer.

In the mean time, however, expect some turbulence, and watch as some categories (but not all) fly off of store shelves. 

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  • Mark Bryan

    I agree with all your points. In addition, one thing people haven’t mentioned related to the Argus report: a big portion of the down trend was related to connected cameras. Notice when that downward trend happened? Around the time Google bought Dropcam. They stopped marketing the Dropcam brand, because they knew they would relaunch it under the Nest brand. Less marketing = less consumer demand.

  • Victor Allen

    Great points. Sky-is-falling bandwagoneers jump on any sign of market adjustment, when in reality it’s a natural and healthy form of natural selection to see some early shakeout. We can then get onto figuring out how to make sustainable business models and associated products that the consumer wants.

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