Smart moves: the battle for the smart home

The battle for the smart home is heating up, as service providers seek to leverage their residential footprint to control Internet of Things devices. Adrian Pennington reports.

With margins on pay TV, landlines and DVRs under pressure from over-the-top providers, multi-service operators are using their broadband connections and established relationship with residential customers as the foundation for a burgeoning smart home business. Diversifying into adjacent digital home markets can augment traditional lines of business as part of a quintuple-play, drive growth in ARPU or increase customer stickiness.

Well-positioned

According to Digital TV Research, pay TV revenues will fall by US$12 billion (e10 billion) in North America, by US$566 million in western Europe, and by US$28 million in eastern Europe by 2022 as revenues are eaten by OTT multiscreen services.

With pay TV revenues declining, traditional service providers with good broadband networks can take some comfort from the huge growth potential predicted for the smart home. ABI Research forecasts a compound annual growth rate of 24% to US$39 billion globally for this market between 2015 and 2020. Analyst outfit ADL meanwhile estimates that smart home revenues will grow by 12% a year until 2020 in Europe. There will be 73 million smart homes in the US by 2021 and 80.6 million in Europe, according to Berg Insight, in a market valued at US$47 billion by 2020, according to Strategy Analytics.

There’s another key statistic to think about. According to GfK Research, 64% of people aged 25 to 34 already own at least one smart home technology. It may be that service providers’ best prospect for growing their customer bases could yet come from cord-cutting millennials who often resist traditional residential bundles, marketing promotions and product offers.

Broadband and pay TV service providers are “relatively well positioned” according to Ovum, to deliver smart home services as they already have a footprint in the home in terms of CPE devices such as broadband routers and set-top boxes, have a known brand, typically already have technical support engineers, and an existing billing relationship with the customer. “However, monetising the smart home is not easy,” warns Michael Philpott, senior practice leader, consumer and entertainment services at Ovum. “It requires significant investment and typically delivers a long-term return on investment. Capitalising on the smart home opportunity from a revenue perspective therefore won’t be for every service provider.” The required investment depends on the business model pursued. Futuresource Consulting argues that there are two major options: a ‘loose bundling’ model requiring less investment and a ‘tight bundling’ model.

In the case of the former, service providers do not own infrastructure in their customers’ homes but have a billing relationship with them, explains market analyst Filipe Oliveira. “This is often the case for mobile phone operators. Entering the smart home requires investment in marketing and in the devices to be bundled. Margins for new devices tend to be above average within consumer electronics and, if the goal is driving ARPU, this can be the right strategy. However, there are limitations in terms of increasing stickiness, as the relationship with the customer is loose and they will need additional incentives or high satisfaction to stay after the contract ends.”

In the tight bundling scenario, service providers own CPE infrastructure and benefit from their existing billing capability. “Investment will still be required in marketing and devices, but players might also have to invest in technical support for the new devices and services being bundled,” says Oliveira. “Even though this model requires higher investment, the strategy is more likely to prove effective from both an ARPU and customer stickiness perspective as leaving the provider might mean that one or several smart home devices and services – for example security or lighting –have to be set up again with a new provider.”

Smart home players

Operators are arguably in a position to become major smart home players for four main reasons. Connectivity is key since smart home services require high-speed wireless broadband inside the home and ultra-broadband connectivity to the home for the exchange of data. Owning the connectivity enables operators to partner with third party service providers as well as to offer their own services. They have an existing presence inside the home. It’s believed customers would rather not add another device from a third party when they already have a hub or CPE from their operator. Most customers already trust their pay TV operators with personal information and billing. Finally, customer service teams and technicians are already in place for what should be fast implementation of equipment and services and troubleshooting.

However, utilities and security companies also have their eye on the smart home prize. For utilities, climate control is the obvious entry point. For security companies, connected cameras and remote monitoring are the initial proposition. Pay TV providers and telcos on the other hand will tend to offer packages that include multiple services such as security and lighting.

“Subscribers are willing to pay for services that bring security to their homes and make their lives easier and more comfortable,” suggests Oliveira. In the US, Comcast has begun extending its smart home offering outward from the Xfinity Home security service it launched back in 2011.

“We’re introducing a new advanced wireless gateway that can get you up to 1Gig WiFi speed,” says David Watson, president and CEO of Comcast Cable on a recent earnings call. “It gives customers the ability to connect an ever-increasing amount of wireless devices in the home and let you simply and easily manage all of that within your home.”

That’s provided they subscribe to Comcast’s WiFi platform xFi. “Broadband providers are the most logically placed to offer smart home and security solutions…. a role that will only increase as homes become more connected,” says Simon Trudelle (left), senior director, product marketing at technology provider Nagra. “However, with this growth comes the potential for greater exposure, and therefore a need to play a larger role in supporting consumers. Service providers can’t simply sit by and wait for crises to occur.”

Research conducted by Futuresource in the UK, France, Germany and US shows that the main purchase triggers for consumers are convenience and safety. The same research revealed that security companies are the most trusted to provide smart home services and mobile phone providers are the least trusted. Pay TV providers come in the middle of the research outfit’s ‘trust index’.

“There is work to be done by those providers to persuade consumers that they are the right smart home partners,” concludes Oliveira.

For example, a certain proportion of households will be willing to pay for a professional home security service – i.e. one that sends professional security staff or emergency services to your home in case of a break-in – if there is a big enough perceived value in that type of service.

“The issue is that not all consumers are willing to pay for such services, and many smart home applications don’t have a big enough value to warrant paying a monthly fee,” says Philpott. “Bundling smart home services with pay TV and broadband can reduce the initial subscriber acquisition cost, which can provide the pay TV or broadband service provider with an advantage over other types of player. However, just as with pay TV and broadband bundles, not all consumers want a bundle so service providers must be careful to get their go-to market strategy right.”

Limited take-up

There are cautionary tales for those who don’t judge the market right. Telefónica-owned O2 UK shuttered its smart home offering at the end of last year barely a year after launch following limited take up.

This may speak to a wider difficulty in convincing the UK market of the economic benefits of such devices. In a Deloitte survey of last year, 48% of British consumers owned no smart home solutions. Some 170,000 Deutsche Telekom households in Germany, however, have been able to manage smart home services through their router since May 2017. The operator has added its Magenta SmartHome package to its Speedport Smart router, allowing users to manage a range of connected devices such as an alarm system for doors and windows. It launched the Qivicon smart home platform in 2013, which Magenta SmartHome is built on.

Smart home services also need to be bundled at attractive price points. According to another Futuresource survey, 55% of all consumers who have not adopted smart home technology explain that this is because such devices are “too expensive”. With this in mind, increasing stickiness might be a wiser strategy than driving ARPU, the analyst suggests.

However service providers approach the smart home, whether as providers of independent solutions or part of quintuple-play services, such solutions are likely to remain niche products that only the largest operators with established infrastructures can support, suggests Trudelle. As an alternative for small and mid-sized players, he points to the option of building smart home services on top of the infrastructures that service providers already have in place, and then partnering with third parties to help them establish and grow market share. Kudelski Group, for example, provides HomeScout, a home security solution that scans and monitors devices within a smart home to identify potential weaknesses.

While smart home security is the logical start point for which “at least some consumers are willing to pay a monthly fee”, according to Philpott, “service providers will need to be more innovative to create mass-market propositions.”

Swedish service provider Com Hem is leveraging its fairly unique, culturally specific relationship with 20,000 property owners – private or tenant owner associations – to introduce a Facebook style network for their tenants. Services include messaging that informs building tenants of a meeting, operational instructions for appliances or notifications for when the communal laundry room is free. This lo-fi start, aided by technology from German TV and broadband technology provider ABOX42, could be added to with more sophisticated applications like monitoring for water leaks, potentially saving the property owner some cash.

“We know providing some services for free opens up the market for later add-ons. That’s how the TV business has worked for us –we have a collective basic TV tier and we upsell to pay TV,” says Com Hem product director Joel Westin. “We intend to use the same for the smart home. For example, we can add individual alarms or charge a fee for third parties to access the service, such as local fast food restaurant deliveries.”

A service provider might be tempted to create its own ecosystem to keep exclusive ownership of valuable usage data, among other things. However, the R&D costs involved in building the necessary infrastructure will remain forbidding for most. One factor hindering rollout is the cost of fitting out older homes. Another obstacle is that consumers will not want to interact with a number of different interfaces. This smart home business is also highly competitive and fragmented. Amazon’s Alexa and Microsoft’s Cortana, along with vendors like Apple, with Homekit & Siri, and Samsung, with SmartThings, are upping the ante with increasingly popular home hub products.

Google’s Assistant, for example, will be installed on devices including Logitech Harmony remote controls, smart lights from ADT, Xiaomi, and IKEA, air conditioners and humidifiers from Hisense and as of last month the Hopper set-top box from US pay TV provider DISH.

This fragmentation could however provide an opportunity for service providers – if they can provide the user experience and single trusted interface – the grail of the gateway to the home. “Consumers will want to interact with one or two interfaces that are easy to use and facilitate interoperability among devices,” says Oliveira.

Choosing the right use-case

When it comes to smart home services, Nokia suggests there are four main use-cases for operators to consider. These are: home security services using devices such as door and window sensors to automatically trigger alarms or relay data and video to a monitoring service; the provision of remote and automatic control of a home for things like heating, ventilation, and air conditioning; smart metering for monitoring the energy efficiency of appliances; and digital health services such as remote consultations.

Operators can potentially partner with security companies to provide 24/7 monitoring and home automation. However, such an offering has low revenue potential as customers will expect an entry-level service comparable with the self-install kits they can buy from electronics shops and DIY stores. Nokia advises operators to bundle home automation with another service. The company believes home security has the greatest potential. Digital health will be driven by private healthcare providers and insurance companies but operators can complement these in-home services with mobile monitoring.

Analyst group ADL segments the market a little differently. It brackets home security with energy and utility management under home automation and sees these services being centralised around a unique user interface. It forecasts a 6% annual growth for these services until 2020. The configuration, maintenance, repair and support services available for digital home devices, such as PCs, TVs, game consoles is another promising segment of the smart home market – one expected to grow at 5% CAGR until 2020. ADL also earmarks the e-health sector as an opportunity for telcos to offer “a unique cost control lever for health stakeholders by dematerialising some healthcare components.” However, since a variety of players including device makers and pharmaceutical companies are entering the market, the value sharing mechanism “is highly dependent on standardisation scenarios”, making the potential for operators uncertain.