Utilities and the Smart Home

Lessons from Google and Nest

By Kevin Meagher, ROC-Connect

The Internet is such an integral part of our daily lives that we struggle to imagine life without it. To date, proliferation has largely been driven by content and speed, but we are now entering a new phase of growth where the everyday “things” around us will be connected to the web. This is the Internet of Things (IoT), and it will fundamentally change the way we interact with our environment.

The IoT will be a game changer for many industries. Utilities have been quick to embrace the IoT to support their smart grid infrastructure, but have been less effective with consumer-facing initiatives. With retailers, telcos, and more recently, insurance companies, starting to sweep into the market in an effort to exploit the IoT to generate new revenues and engage consumers, why are utilities lagging?

The entry of Apple, Google and Amazon into the IoT and smart home space created huge interest, particularly when Google paid $3 billion for Nest after four years trading. With Microsoft quietly building their presence in the IoT, it seems that the market is really starting to take-off and the multitrillion-dollar growth forecasts are realistic.

In what is still an early market, most major channels adopted a strategy where they partnered and sold IoT devices in what could be considered affinity programs. Others have shown more commitment and developed their own branded products and services. Utilities have largely sought to take the low cost, low risk affinity approach by acting as a reseller of third party products; this is that market that Nest attacked. With hindsight, was this really the smartest approach?

Recent news that Google is unhappy with the financial results from Nest has ultimately led to the departure of Nest founder and CEO Tony Fadell. The very public argument between Fadell and Greg Duffy, the founder of Dropcam, the camera company Nest acquired for $550 million just two years ago, was a clear sign that all was not well.

While the buy may have seemed like an obvious move, in reality, many people were surprised when Google acquired Nest for $3 billion. The more charitable assumed Nest had some secrets in the pipeline that justified the valuation, others just thought it was typical of the excesses of Silicon Valley.

The big question is: what will all this mean for utilities companies starting to think about innovating in the smart home space?

When Nest first came to market, it showed how the IoT and connectivity could be used to reinvent an everyday device. It transformed the traditional thermostat into a super cool product with an exciting service supported by a slick app user interface. It did something retailers and thermostat manufacturers thought was impossible and got consumers to pay more than four times the traditional price.

As a device manufacturer, Nest created a brand and was a huge success, but there were fundamental flaws in both its strategy and business models given its ambitions for the smart home and IoT.

The Nest thermostat was a single, proprietary, point-to-point (P2P) solution; it was just one product with an app. P2P solutions for various connected devices such as door locks already existed, and while they initially performed well, there is a big difference between a smart device and a smart home.

Early evidence from door lock manufacturers indicated that the ability to work as part of an open eco-system was critical to success. Consumers may be drawn to a new, super cool device, but they quickly recognize the limitations. They do not want to stand on the doorstep opening the door with one app, controlling the thermostat with another, lights with a third app, and so on. The value of the IoT is not that we can talk to a device, but that devices can talk to each other.

Other companies did less marketing and more thinking. Samsung saw what the SmartThings device had done by building a hub and ecosystem of devices with an open architecture that allowed developers free access to innovate and build complete smart home solutions. Lowe’s, with its Iris platform, and Home Depot with Wink, had similar strategies for the smart home. All the main service providers, AT&T, TWC, Comcast and others developed their own smart home solutions built on service platforms. The retailers and service providers had similar models that focused on giving consumers breadth of choice with what are considered “curated” solutions; these are managed ecosystems of devices built around a hub and cloud platform with a bundle of services.

Nest does not accept this model. It is trying to compete by slowly adding more proprietary devices and working to lock partners and consumers into its ecosystem. It added a camera with the acquisition of Dropcam, and tried to reinvent the fire sensor, but it was not a great commercial success. Nest has started to open its APIs so its products will work on other service platforms, but it has limited access, which has created new issues for channel partners and consumers. Nest has great smart devices, but it is not a smart home provider. As the IoT rapidly expands, Nest’s business model will continue to struggle.

The moral for utilities thinking of innovating in the smart home is clear: Define your vision, agree on your strategy and be clear about your business model at the outset. Utilities will need partners, and ultimately, the choice will depend on future ambitions.

Bundling simple, narrow, focused propositions as affinity programs with brands like Nest might actually make sense in the short term because it creates instant buzz, is low cost and low risk. In the long run, however, it’s likely to deliver limited benefits. Given the strategic nature of the IoT to utilities, it will probably pay to commit and invest in developing a broader, open, smart home solution that can scale over time.

Kevin Meagher is the senior vice president of business development for ROC-Connect, a technology company offering an enterprise grade cloud platform to support the IoT and the deployment of smart home products and services. Meagher has been recognized as a global pioneer and thought leader in the smart home and IoT and has lectured on business management and published papers at national and international conferences. Meagher is the former vice president and general manager of Lowe’s Smart Home initiative where he led Lowe’s IoT program, including the development of deployment of connected products and services through stores. Reach him at kevin.meagher@roc-connect.com.

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