GETTING FROM HERE TO THERE: HOW TO MONETIZE THE SMART HOME

THROUGH SMART HOME SERVICES

Today’s smart home is one characterized by connected products that aim to bring simplicity to our lives through control and automation of home systems like lighting and access control. Despite the obvious convenience that these products deliver, the market struggles to define additional value propositions to drive mainstream adoption.

In many ways, this is the natural market evolution for a new technology; early adopters are often enthusiasts, willing to invest time and money in untested products and services. Early offerings from companies such as INSTEON, SmartThings and other “smart home” companies have served this market well, with complete DIY platforms that allow the consumer to buy into a system at a low price point and expand as they see fit.

Innovation around the broader Internet of Things (IoT) space over the last several years has resulted in a wave of connected technologies, from wearables and smart watches to digital health devices and connected cars. In the home, appliance makers have started to integrate wireless technologies like Bluetooth and Wi-Fi to enable remote monitoring, digital content integration and other value-added features.

The net effect of new connectivity in our “things” has meant an explosion of options for the consumer and the possibility of new revenue streams after the initial sale for product manufacturers. However, the potential of a highly connected consumer for manufacturers, retailers, consumer packaged goods (CPG) companies and service providers is still largely untapped.

INTRODUCTION: TODAY’S SMART HOME

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In order to transform the market to support broad adoption of smart home technology, progress is required along two major axis:

First, the industry needs to unify around a set of technology standards that enable interoperability across devices and product ecosystems. Some market consolidation around technology frameworks is already happening at the network, application and services layers – the recent acquisition of Universal Plug and Play (UPnP) by the Open Internet Consortium (OIC) is one example –this is expected to continue. Just as we saw the Internet take off with the adoption of IP and the personal computer market take off with adoption of technologies like USB, mass adoption of smart home will require work towards interoperability through unified standards.

The second major market axis of transformation is a business one, where companies begin a shift towards operating around a service-first model. Well-defined API strategies, structural shifts in business operations around long-term customer relationships and creation of new core competencies around data analytics and cloud computing all require significant investment in time and resources.

The purpose of this report is to analyze the current state of play around connected device monetization and provide a roadmap for defining and executing a monetization strategy for connected devices by integrating services and features beyond the initial purchase.

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NextMarket Insights is a research firm focused on emerging consumer technologies. Our focus areas include smart home, Internet of Things, digital media, connected TVs and the broader digital media landscape.

NextMarket Insights was founded by Michael Wolf, a long-time connected home analyst. Wolf was the founding Vice President of Research for Gigaom Research and has held management and principal analyst positions at In-Stat and ABI Research.

Wolf hosts the most popular smart home podcast on iTunes, which you can find at www.thesmarthomeshow.com. If you would like to stay up to date on the smart home throughout the year, you can do so by reading Wolf’s popular weekly smart home newsletter at: www.smarthomeweekly.net or subscribing to it by email here.

For more information about NextMarket Insights, our analysts and our research, please visit NextMarket’s website at www.nextmarket.co.

If you have questions about this report or would like to inquire about other research or advisory services, you can also contact NextMarket Insights by email at info@nextmarket.co.

This report is part of the Smart Home Insider service from NextMarket. To find out about the Smart Home Insider service and subscription options, email us or call 317-455-5529.

ABOUT NEXTMARKET INSIGHTS

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Ayla Networks provides the industries first Agile IoT Platform, accelerating development, support, and ongoing enhancements of connected products for the Internet of Things.  Ayla’s software fabric runs across devices, cloud, and apps to create secure connectivity, data analytics, and feature rich customer experiences.  Offered as a cloud-based platform-as-a-service (PaaS), Ayla’s flexibility and modularity enables rapid changes to practically any type of device, cloud and app environment.

For more information, please visit: www.aylanetworks.com

ABOUT AYLA NETWORKS

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There are varying reasons for the lack of significant traction for new service and commerce models for the connected home, but we have identified the following hurdles that currently are holding the market back:

BARRIER #1: SERVICE-CENTRIC MONETIZATION MODELS ARE DIFFICULT FOR MANUFACTURERS

Product manufacturers do some things very well: hardware design, channel development, marketing, aftermarket customer support. While these provide a foundation for success in selling products, companies will need to develop new competencies to thrive in the era of IoT.

Perhaps the most important – and difficult - transition for most companies is creating new products that create a dual role as service providers. Selling products with limited aftermarket support is one thing, but the cultivating the internal expertise to develop consistently connected devices that can be managed, monitored while also layering new services into the offering is difficult. Rarely is this skill-set found in-house for most modern consumer product manufacturers.

While some, like General Electric or Samsung, have been investing in these core competencies for some time, the vast majority of established hardware and product manufacturers are playing catch-up in this space.

BARRIER #2: STRUCTURAL CHANGE IS REQUIRED IN SERVICE-CENTRIC BUSINESS MODELS

Monetization models built around IoT often require significant structural changes within a company. New persistent relationships with their customers through a connected model requires not only the ability to recreate the up front sales and marketing approach, but also the significant investment of resources in back-end support that carries the customer through the product life cycle. Whether through continuous software updates, integration of new partners or delivery of advanced

SECTION 1: BARRIERS TO A SERVICES-DRIVEN CONNECTED HOME

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data analytics to improve their offering, necessary changes prove to be difficult for most hardware manufacturers due to internal business structures that are not built to deliver on this vision.

BARRIER #3: CONSUMERS ARE NOT CONVINCED THEY WANT ANOTHER SERVICE PROVIDER

When you look at today’s consumer, there is little doubt they are advancing rapidly in their understanding of new technologies. Millennials, Gen-Xers and even Baby Boomers have embraced new technologies such as touchscreen interfaces, constant Internet connectivity, mobile app-based control and content models that create incredible new capabilities in their products.

At the same time, the vast majority of consumers are hesitant to change the nature of their relationship with nearly every product category. Part of this hesitancy is due to the belief that subscription models and new transaction-centric models require a longer and potentially more expensive commitment from them over the life of a product. Negative opinions of telecommunication and broadband service providers, home security companies and other service providers have added to this perception that “being connected” often comes with an additional expense.

In most instances, consumers have not been clearly told what the additional value of a “connected relationship” means. In the case of a subscription model, often times they are satisfied with the “free” part of freemium and have not seen enough of a reason to pay for a subscription. In other instances, they may believe being “connected” means an uneven exchange of their personal privacy in the form of name, email and location for largely uncertain benefits.

BARRIER #4: RETAIL AND SALES CHANNELS HAVE NOT EVOLVED

Another significant hurdle in transitioning a customer towards a connected consumer model is the failure of retail and online sales channels to adapt. Because most products today are sold at retail, it’s hard to communicate the full array of

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benefits and the nature of what the manufacturer hopes will be an ongoing relationship.

A good example of this is televisions. The vast majority of new digital TVs come with network connections and embedded software that enable a variety of new consumer-facing services. But consumers who purchase these products largely just see these as screens to display their existing video content. Packaging and in-store displays tout the benefits of app stores, but TV manufacturers and their retail partners are still trying to define how they can create a more persistent, service-centric relationship with their customers.

As companies look to create an ongoing relationship with consumers, they need to build relationships with new partners, invest in parts of their business such as technology and channels, and convince the consumer that there is value and additional benefits inside their “dumb” boxes

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As consumer product and services companies begin the transition to what some are calling the “third wave” of the Internet, it’s important to understand how this transition will change the overall business. The arrival of IoT and a connected intelligent home will fundamentally change the way consumers interact with these companies, which in turn will bring resultant change to every organization in the ecosystem.

Figure 1: The Changing Consumer Relationship with the Connected Consumer

Factory To Front Door (And Beyond): The extent of the traditional relationship with a consumer for any number of products typically reaches from the point of sale to the home. Occasionally, a negative interaction with a product would trigger an opportunity for the manufacturer to interact with the customer and deliver aftermarket support. With the arrival of IoT, they can expand the relationship and

THE CHANGING CONSUMER RELATIONSHIP

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SOURCE: NEXTMARKET INSIGHTS

proactively look in the home and into actual usage behavior to deliver relevant services and value. Product companies need to better understand how to service their customers from the time the product ships to the time it’s sitting in the home in use.

Persistent & Proactive: While consumer product companies have tried to maintain brand loyalty with their customers for decades, these relationships have, for the most part, remained “distant” due to the infrequency of interaction. In between purchase decisions, the relationship falls largely dormant, with occasional touches through advertising, email marketing and support or services calls. Connected devices and services change the nature of this “bursty” relationship to one that is both persistent and proactive. Because the product is consistently connected, companies can provide instant support before the consumer knows they need it, while also being first-in-ine to offer new products or services.

Data-Driven: One of the most common reactions by traditional consumer product manufacturers when adopting a connected product strategy is the realization they are unprepared for the deluge of data. Jarden North America’s President Alejandro Pena admitted one of the biggest challenges when they started shipping their connected Crock Pot and connected Mr. Coffee was trying to manage and understand the sheer amount of data provided to them. Data requires new expertise to understand and once competencies are built to act upon the data, it will create significant structural changes in product and service design, sales, marketing and support both up and downstream in a business.

Omnichannel: Traditionally, the way in which consumer products and services reach the consumer is fairly static. At best, buying behavior is often hardened by habit, and more concerning, consumers may not have the option to discover products through alternative channels due to a lack of coordination and integration of databases across operating units. This is changing, however, as the continued maturation of Internet and mobile channels have also resulted in increased integration between physical retail, online and mobile. The arrival of connected devices and services bring this maturation process full circle, as connected products themselves represent an organic integration between mobile and Internet.

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For the vast majority of B2C companies, relationships with consumers will continue to evolve over time as a result of IoT based technology, which will in turn bring about significant change in company business models. Long term, companies that don’t embrace structural change in industries where natural competitive alternatives are present and switching costs are low will remain in danger, particularly if competitors do embrace the inherent competitive advantages brought to them through leveraging IoT technology.

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As discussed in the previous section, the nature of the relationship with the consumer is changing. While the velocity of change represents a threat for companies resistant to change, it can represent significant opportunity for willing companies to solidify current lines of business, expand into new adjacent businesses and open up new revenue streams.

Figure 2: The Four Monetization Models for Smart Home

The primary paths toward monetization in the connected home splits into four different categories as illustrated in Figure 2 above: Support, Commerce, Data and Services.

THE EMERGENCE OF NEW IOT AND SMART HOME MONETIZATION MODELS

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SOURCE: NEXTMARKET INSIGHTS

RETHINKING CUSTOMER SUPPORT

Table 1: Product Support, Old vs. New

While many view customer support as simply a cost of doing business, enhanced customer support can result in direct revenue in the form of support services. Further, research has shown that strong and consistent support is perhaps the best form of customer retention.

No place is this truer than in the new world of IoT. The biggest change with IoT-powered consumer support is one in which the experience becomes proactive. Where traditional customer support is reactive by nature and a support team is contacted when something has gone wrong, advanced analytics supplying real-time generated data allow companies to anticipate a customer problem or fix a technical problem before the customer discovers it.

This type of proactive support can become a norm, particularly if a company continues to maintain and conduct in-field upgrades and diagnostics of their client infrastructure. By leveraging the power of connected, upgradeable devices that

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SOURCE: NEXTMARKET INSIGHTS

leverage new capabilities delivered through software, it’s also possible for companies to decrease the cost of support over the life of a product. Devices will continue to improve in overall reliability due to persistent in-field upgrades.

One example of a company taking advantage of “increasing reliability” of a product over the course of a long time is Sonos. The company has consistently added new features to its connected speaker systems, often resulting in improved performance. In one case, Sonos even offered a software upgrade that eliminated the need for an additional piece of equipment, lowering the cost of using their products for existing and new customers.

NEW APPROACHES TO COMMERCE

The most direct path to smart home monetization beyond the initial sale is through new forms of commerce. The ability to direct consumers to purchase additional products, upgrade, or purchase adjacent and ancillary products and services is significantly enhanced when a device is connected or “smart”.

In a traditional consumer sales model, manufacturers often rely on conventional sales and marketing methods to enable aftermarket sales of their own or partner products such as coupons, loyalty programs, email, online and direct mail marketing and broadcast advertising. When a device is connected, the additional revenue opportunities through connected commerce become significant.

A relatively new form of connected commerce is through automated consumption and ordering of consumables. Amazon’s Dash Replenishment Service is the most visible example of this concept, where consumers can automate ordering of household supplies, food and consumable products. Devices themselves are registered and consumers set up preferences around reordering of products. Amazon is not the only example. Hiku offers a discrete product scanner that integrates with retailers such as Walmart and Peapod for both in-store pickup (Walmart) and home delivery (Peapod) of groceries, home goods and other consumables.

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Table 2: Commerce Monetization Old vs. New

Automated commerce offers a potentially attractive and lucrative form of revenue for manufacturers, CPG companies and other consumer product companies. However, such initiatives require significant coordination with product manufacturers, online storefronts and consumer product companies to enable fulfillment. This requires product manufacturers to provide guidance and toolsets to their online partners in order to integrate with proprietary or partner platforms, and retailers to provide public or private APIs for manufacturers to enable true order automation and integration.

Mobile commerce has “greased the wheels” for these types of newer models, as companies have already started to think about taking omnichannel sales approaches that integrate in-store, online and mobile sales for consumers. Mobile apps are often the first-screen for connected devices, acting both as a control point

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SOURCE: NEXTMARKET INSIGHTS

and also an upsell opportunity using integrated storefronts to offer related products and services.

MANAGING THE DATA AVALANCHE

Table 3: Data Monetization for the Connected Home

One of the biggest differences between a connected device business model with more traditional approaches is the amount of useable data derived once a product is connected. Many consumer hardware and product manufacturers have not traditionally used deep analytics to parse big data sets in the process of market analysis, product positioning or design. In some ways, an apt comparison is that ‘Moneyball’ approach to baseball, where teams have traditionally done much of their building based on feel, institutional knowledge and some guess work. While informed knowledge based on experience remains hugely valuable in designing products, massive insights around actual consumer usage can be ascertained once a company delves into in-field usage data.

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SOURCE: NEXTMARKET INSIGHTS

In some ways, harnessing the data from connected product approaches remains one of the biggest challenges, as illustrated in the earlier example with Jarden Consumer Solutions. They simply did not have the in-house expertise to make the data actionable with their first set of connected products. Many companies are building this expertise in-house, while others are leveraging third-party analytics platforms to help guide their future product development as well as to package data into both consumer and industry facing value-added services.

And it’s this latter part – data-centric services – which represent one of the biggest new opportunities for connected device makers. When products reach scale, consumer data around usage can not only be hugely valuable for both the product manufacturer themselves, but leveraged as packaged insights for partners.

Lastly, connected device data can be used to provide additional applications and services to consumers. Whether it’s a connected thermostat and data related to energy consumption or a connected irrigation system that informs a consumer to understand the best time to water their grass, there are significant native and third party application and service opportunities for companies who can package the data into consumer-facing formats.

CAPITALIZING ON CONNECTED HOME SERVICES

One of the most exciting new areas of economic growth is the rise of home services economy. New residential services centered around home cleaning, delivery, maintenance and other segments have flourished with the rise of the Internet, and the addition of connected devices and products to the equation create interesting and potentially lucrative new use cases.

One interesting new approach to connected-device powered home services was recently rolled out by August Home. August is manufacturer of connected door locks, and in September they unveiled August Access, a home-services integration platform that enables providers of home services such as Postmates (delivery services), Wag! (dogwalking services), Bloom Nation (flower delivery) and many

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more. The platform enables service delivery personnel to access and enter homes using their own native field apps.

Table 4: Smart Home Services Monetization

These types of innovative integrations could facilitate new home service businesses. Landscaping businesses could access data through connected irrigation systems. In-home eldercare improves with the addition of connected devices that can remotely manage and coordinate care. In short, many traditional service-centric businesses for the home can be augmented while entirely new offerings become available if powered by connected device platforms.

One of the first strategies for monetizing connected devices has been through the creation of subscription services. The logic behind this move makes sense considering many of the first deployments for consumers revolve around businesses that traditionally offer managed services like home security.

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SOURCE: NEXTMARKET INSIGHTS

However, given the traditional resistance against adding additional recurring payments by many consumers, initial attempts at subscription services have fallen flat. The reason for slow demand is usually two fold: one, consumers traditionally won’t pay for a premium subscription for device-related services they believe should be included in the purchase price. One example of this is the premium offering from Lowe’s Iris, which saw very soft demand for the pay-option in what was positioned as a freemium model. This dynamic is more pronounced when comparable “free” alternatives are available in the market.

The second reason is device manufacturers often do a poor job of spelling out the incremental value proposition provided through subscription services. Consumers are smart, and unless the benefits are clearly defined, they’ll usually opt to not give away their credit card information for a recurring payment.

Despite this initial reluctance among consumers, subscription services still have a potentially bright future in the smart home. The first step for manufacturers is to create well-defined new capabilities and related services that are not available or have a significant cost-benefit when compared to other traditional offerings. DIY home security products with low-cost monitoring such as SimpliSafe provide a good illustration of one such example.

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Across nearly every consumer product category, the market is undergoing a significant and long-term transition. The arrival of IoT technology will provide new and potentially disruptive market opportunities. Incumbents should see this as both an exiting chance to reinvent themselves and their product portfolios while leveraging existing brand equity and shoring up any poor or lagging brand identities.

On the flip side, there is significant opportunity for wholly new entrants in a variety of markets within the broader connected home. By leveraging new technology and associated business models, newer companies can move quickly to carve out demand by showing consumers what’s possible in existing categories or offering new products and services that have not been available.

However, for both legacy product makers and new entrants, monetizing connected products through the four strategy quadrants defined in this report requires significant investment in both new internal capabilities and, often, through leveraging external expertise. Below are suggestions for getting from “here to there”:

Define and develop an API strategy. One of the biggest differences in the connected device era and historical approaches to markets is the need to define a clear API strategy. Creating a connected device in a vacuum is not a reality, and data-sharing with partners, suppliers and customers is a requirement to “pull off” a connected product.

Think holistically about the entire consumer value chain. Just as you need a well-defined API strategy, you also need to understand how to leverage both proprietary and partner data and platforms from ‘factory to the front door’. Well-designed connected product services are carefully orchestrated creations that usually leverage multiple organizations, internal and external, to ensure consumer satisfaction and, ultimately, scale.

CONCLUSION: GETTING FROM HERE TO THERE

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Leverage third party partnerships where it makes sense. While big organizations like Amazon or GE can often create products and related services largely (but not entirely!) from internal resources, the vast majority of consumer product companies do not have the entire answer internally. Whether it’s in product design, an IoT cloud, on-going service management or data analytics, there are often third party partners that can do something better than you can internally.

Design a company architecture for the connected device era. Traditional consumer product companies are, as a rule, not designed for a connected devices and services business model. Creating a company built around a persistent consumer relationship, continuous product and service improvement and that delivers value-added commerce and subscription services remains a foreign concept for most companies. Looking long and hard at your existing company structure and sales channels, as well as dismantling legacy fiefdoms not built to service is a requirement for companies venturing into the new world of connected devices.

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