Real Estate Investing
Home Automation Companies and the Smart Home Future
October 16 2019 - The Challenge For Smart Home Companies: Getting A Foot In The Door By Investors Business Daily
Sales of smart home devices are climbing, but many households are skeptical of their benefits and wary of potential privacy and data security breaches.
Home automation companies are charging into the smart home future. They want to add computer intelligence to everything via smart home devices — from keyless door locks opened with fingerprint scanners to toilets that flush and clean themselves — and everything in between.
The offerings are endless. There are showers that remember your preferred water heat and flow rates. You can get climate-control systems that keep tabs on the temperature you want, humidity and even the number of people in the room. Also on the menu are internet-connected light bulbs that will individually dim or brighten, depending on your voice-activated whims.
But many consumers are leery. News articles questioning the privacy and security of home networks and connected devices, including always-listening smart speakers, have put off potential buyers. The science-fiction fantasy of a truly smart home has hit a harsh reality where most consumers don't share the enthusiasm of technologists.
"In 2018, the industry did not reach a substantial number of new buyers," said Chris O'Dell, an analyst with Parks Associates. "What we did see was that those already owning smart home devices continued to purchase them."
Indeed, the good news for the industry is that people who have adopted smart home technology like it and are adding more connected devices to their homes. One market research firm predicts global shipments of smart home devices will surge 24% this year. Another industry watcher says consumer spending on smart home hardware and services could top $100 billion worldwide.
Smart Home Device Acceptance
The key for home automation companies, however, is to convert the holdouts. The average smart home device household has six contraptions, but the average for U.S. broadband residences overall is only 1.4.
"So essentially, the industry is struggling to reach new buyers, but they're succeeding in getting repeat purchases from those who already have smart home devices," O'Dell said.
Some 28% of U.S. broadband households own at least one smart home device, according to Parks Associates. Parks does not include intelligent speakers in its smart home device totals because it considers them more as entertainment devices. Voice-controlled smart speakers such as the Amazon Echo, Google Home and Apple (AAPL) HomePod are in 36% of homes.
The majority of consumers are on the sidelines, waiting to be convinced about the benefits from home automation companies.
Many worry about artificial intelligence and machines having minds of their own. In August, several owners of June smart ovens reported that the appliances were turning themselves on overnight and preheating to 400 degrees or higher. The company promised a software fix.
Others are turned off by the complexity of installing and maintaining smart home devices or think it isn't worth the expense.
The negative sentiment has been a drag on smart home stocks like Alarm.com (ALRM), ADT (ADT), Arlo Technologies (ARLO) and Resideo Technologies (REZI).
Ease-Of-Use Is An Issue
Resideo Chief Executive Mike Nefkens thinks the answer for home automation companies to sell more smart home devices is to make the gadgets simpler to operate.
"Nobody wants 20 apps on their phone to control their smart home devices," Nefkens said. Resideo, which sells products under the Honeywell brand, is working to unify home automation devices under a single app that it plans to release in December, he says.
Right now, smart home devices are for wealthy "one-percenters," Nefkens said. To make the technology mainstream and boost smart home stocks, it has to be simple, integrated and affordable, he says.
The value proposition from home automation companies is that they can save you money, save you time and improve your well being, Nefkens says. Resideo sells products that manage heating and cooling, water and home security systems.
A truly intelligent smart home device is proactive. For instance, it can alert you to an impending failure of your water heater, Nefkens says.
Nefkens boasts that Resideo is one of the few home automation companies that makes money on the hardware it sells. Other smart home companies sell at a loss and hope to attach paid services to those devices.
Home Automation Companies' Top Seller
The most commonly owned smart home device is a smart thermostat, such as from Nest, a unit of Google parent Alphabet (GOOGL). Some 11% of U.S. broadband households have smart thermostats.
Networked security cameras from companies like Arlo are in 10% of homes.
Video doorbells from Amazon.com (AMZN), Google and others are a fast-growing category and are in 8% of homes, according to Parks Associates.
Smart light bulbs and lighting are at 8% adoption and smart door locks are at 7% penetration.
Convenience Sells Smart Home Devices
The No. 1 purchase driver for smart home devices today is convenience, says Parks analyst O'Dell. People can lock their doors, turn off their lights and adjust their thermostat with voice commands or a tap on a smartphone app. That beats having to walk around the house at night and checking to make sure everything is secure, he says.
The most common user interface for the smart home is apps on a smartphone or tablet, he says. But voice commands to smart speakers are quickly catching up.
Because smart home devices are a category, not just one device, the reasons for adoption are manifold, says IHS Markit analyst Blake Kozak.
"Some consumers might want a video doorbell for package theft or to identify when their kids come home from school," Kozak said. "Others might want a low-cost alarm monitoring system or water leak sensors. It really depends on the individual consumer."
Smart Home Stocks Include Professional Installers
Because of the complexity of today's smart home systems, many consumers are turning to professional installers. That's created opportunities for companies like Comcast's (CMCSA) Xfinity and Vivint. Even consumer electronics retailer Best Buy (BBY) has stepped up its presence in the market and gained prominence as a smart home stock.
"In the coming years, the professional market will have a much bigger role in terms of supporting the consumer," Kozak said.
One market opportunity for home automation companies is independent living solutions for senior citizens, he says.
Adult children can remotely monitor the activities of their aging parents to make sure they're OK. They can see video of grandma moving around the house or be alerted if there hasn't been activity.
Hacked Baby Monitor Spurs Call To Action
But if you can access a camera on a network, hackers potentially can too. Even worse, one poorly engineered connected device can open a digital window to your home router and other smart home devices.
"Some of these devices are an invitation to get hacked," said Jerry Chen, founder of Firewalla and a former security engineer at Cisco Systems (CSCO).
Firewalla makes low-cost hardware that lets consumers detect and block unwanted intrusions to their home networks and gadgets. Chen came up with the idea for Firewalla in 2015 after a cheap, off-brand, Chinese-made baby monitor he had purchased was hacked.
"I was walking across the room and the camera was following me," he said. "I'm a security guy and I realized that I was hacked. It was really scary."
Firewalla can track where data is flowing to and from your devices. In the case of his hacked baby monitor, the traffic went to China, Russia and elsewhere in the U.S. Often the hackers want to use your home network and devices to host botnets for malicious activities, Chen says.
Chen suggests buying devices from reputable home automation companies like Amazon and Google, because they have more accountability.
Internet Giants Look To Dominate Smart Home Devices
Giant U.S. tech companies Amazon, Google and Apple are trying to be the smart home stocks that unite the complicated smart home ecosystem. All three have voice-activated smart speakers with personal assistants. They also have developed software tools and protocols to link with and control smart home devices.
But to improve the accuracy of their voice control systems, those companies often have human workers listening to snippets of audio recorded in users' homes. That gives many people the willies. It also has raised red flags for government lawmakers interested in promoting internet privacy.
Strategy Analytics forecasts consumer spending on smart home hardware, services and installation fees will reach $103 billion worldwide in 2019. It projects spending will hit $157 billion by 2023, for a compound annual growth rate of 11%.
It sees hardware accounting for $55 billion in smart home sales this year and $81 billion by 2023.
Research firm IDC predicts that shipments of smart home devices worldwide will rise 23.5% to nearly 815 million units in 2019. It sees shipments topping 1.39 billion units in 2023, for a five-year compound average growth rate of 14.4%. It includes smart speakers and video entertainment devices in its forecasts.
Seeing Is Believing With Smart Home Devices
A challenge for home automation companies is demonstrating the benefits of smart home technology, Kozak says.
"It's really something you have to try," he said. "Once consumers experience it firsthand, they get it."
Smart home device vendors just have to get their foot in the door with consumers, O'Dell says.
"The issue is getting consumers who have never owned one to purchase one," O'Dell said. "Because once they do, our data shows that it's likely that they're going to purchase multiple devices."
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