Key Competitive Elements for Smart Home Service Providers

The smart home market and the explosion of connected products, which falls under the umbrella term the Internet of Things, have created a dynamic environment filled with opportunities and risks for service providers.

Both conditions are standard for a market in an early-adopter stage. The speed with which it migrates to an early majority depends on the quality of marketing, the functionality of products/services, and the strength of new business plans.

Currently 13% of US broadband households have at least 1 smart home device, such as smart sensors, lighting, and door locks, and nearly two-thirds of these owners have their devices attached to a centralized controller provided by the company providing professional security. Security providers such as ADT have given the marketplace its early punch, and they are in a strong position to take advantage of the early growth potential in the smart home. Among US households without a security system, 20%-40% express a willingness to adopt a home security system with smart home features.

Building Consumer Awareness of the Smart Home

This promising consumer interest has attracted many new entrants. Many broadband service providers are actively selling monitored security systems, and the marketing clout they bring is important for all players. In a recent Parks Associates survey, 60% of US broadband households were not familiar with smart products and services, and even more did not know where to buy them. The strong brands, large customer bases and marketing budgets, and extensive direct sales experience of providers like AT&T and Comcast can help increase awareness and educate the mass market about smart home capabilities.

That brings into focus the next challenge: communicating the value proposition. The smart home has multiple-use cases of varying value to different consumers. The security industry is an early leader because it is a mature market with a clear, well-understood value proposition that can also serve as an anchor for additional smart home offerings. The same sensors that are used to detect break-ins can be managed remotely to turn off lights and control the thermostat.

Security dealers have also benefited from the one-to-one selling approach of their sales channel. This method addresses both the lack of awareness and the importance of stressing appropriate value propositions to each customer. Sales channels that use a consultative selling approach have been the most successful in the smart home.

Service providers have the customer relationship to build a business model for this type of outreach. What is required is a two-way avenue that provides a concerted educational outreach while also opening options for households to come back with questions and issues. The company that successfully creates and deploys this outreach model will have an important sales advantage.

The Evolution Toward Open Systems

Consumers, despite low awareness of smart home products, do have strong opinions on how these products should work together. They want and expect products to be interoperable and, in fact, prefer the smart home as a system of interoperable products over standalone devices.

This requirement has not yet been a major barrier. Today, smart home service providers control almost every aspect of their offering. Consumers choose their service provider, and the provider chooses everything else: the compatible products, the algorithms that control those products, the look of the user interface, and the installation process.

However, as the market expands, this approach will become untenable. Consumers are already chafing under their lack of control, especially as they bring new products into the home. For example, many smart home devices are popular as gifts. Among the smart home devices purchased so far in 2014, 22% of smart security cameras and 27% of smart plugs/adapters were given as gifts. If the recipients have a system in place, they will expect these new devices to work with what they already have.

Service providers understand these market forces and the effect of increasing competition — open systems will conquer closed systems in the long term. As interoperability technologies coalesce, the market will shift from vendor-controlled systems to consumer-controlled systems. Consumers will choose what products to purchase, when they are purchased, how they are purchased, what apps or subsystem controllers control those products, and what smart home platform, if any, they want.

Value-Added Services and Product Breadth and Depth

Service providers that can deploy open solutions and give consumers more control will have a major competitive advantage in this market. They will be in a better position to monetize this shift toward open systems, which will require innovative business models and create opportunities for new and unique partnerships, including software, hardware, and other service players.

It will be a significant challenge to integrate the ever-expanding number and types of smart products, and service providers must stay ahead of the game to support the devices that customers will want to add in the future. When selecting or developing the platforms for their smart home offerings, service providers must select solutions that are open to integration with new products, open to apps, and include advanced data analytics capabilities.

At the same time, as products integrate more sensors and the accompanying value-added services, the depth of products, meaning their scope, complexity, and service components, is also increasing. For example, a door lock may add a networked camera, two-way voice, and an accelerometer in order to sense when someone is approaching the door, send an image, and also sense forced entry.

As manufacturers add more of these value-added services to their devices, service providers will have to examine steps to integrate those services into their existing platforms while keeping the user experience simple and easy to use. These services will add new value, additional "stickiness", and new revenue potential, but they also introduce competition from other verticals, as manufacturers will work aggressively to fight commoditization through industrial design, enhanced product features, and whole-product solutions.

There is the opportunity for partnership as well. For some products, smart home service providers can become a new channel, providing incremental product sales, and if the sales provide adequate revenues, manufacturers will likely accept the cost for integrating with smart home platform vendors. But either as partner or competitor, service providers must ensure that new services can be deployed without generating false alarms or negatively impacting service functionality.

Data Analytics — Creating New Business Models

With service deployment and integration as key competitive advantages for service providers, the use of cloud-based data analytics is becoming an important differentiator. The direction of evolutionary progress bends towards devices that act on an owner’s behalf. Smart home players, to differentiate their products, will focus on providing value-added features and intelligence that relies on data and cloud processing capabilities.

Data analytics will also be key in driving new business models. Service providers have multiple strengths when competing in the smart home ecosystem, but a key weakness is reliance on a revenue model based on recurring monthly fees. Parks Associates research has found over and over again that consumers are reluctant to take on a new service or solution if it means taking on new monthly fees.

Recurring consumer fees will eventually give way to alternative business models. Many different opportunities are being developed that leverage the data and connection to a specific product or end user. For example, advertising, lead generation, participation in energy markets, and in-app product sales allow service providers to collect recurring revenue but not in the form of a monthly fee paid by the consumer.

Changes in this direction are already underway, and the providers that can successfully navigate the need for innovation services combined with a simple consumer solution will find success in the smart home — and unlock the revenue potential in this new market.