Smart Moves - The battle for the smart home

DTVE

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

https://www.digitaltveurope.com/magazine/dtve-june-july-2018-issue/
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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 quint-play, drive growth in ARPU or increase customer stickiness.

According to Digital TV Research, pay-TV revenues will fall in North America by $12 billion, $566 million in Western Europe, and $28 million in Eastern Europe by 2022 as revenues are eaten by OTT multiscreen services.

Traditional service providers can take comfort from the huge growth potential predicted for the Smart Home. ABI Research forecast a CAGR of 24 percent to $39bn (global) between 2015 and 2020. Analyst ADL estimates that Smart Home revenues will grow by 12 percent a year until 2020 in Europe. There will be 73 million Smart Homes in the U.S by 2021 and 80.6 million in Europe, according to Berg Insight, in a market valued at $47 billion by 2020, according to Strategy Analytics.

There’s another key stat too. According to GfK Research, 64 percent of people ages 25 to 34 already own at least one smart home technology. It may be that service providers' best new customers could 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 STBs, have a known brand, typically already have technical support engineers / installation engineers, and an existing billing relationship with the customer.

“However, monetising the smart home is not easy,” warns Michael Philpott, senior practice leader, Consumer & Entertainment Services, Ovum. “It requires significant investment and typically has a long RoI. Capitalising on the smart home opportunity from a revenue perspective therefore won’t be for every service provider.”

The level of investment depends on the business model. Futuresource Consulting splits this into two: a ‘loose bundling’ model requires less investment than a ‘tight bundling’ model.

In the former, service providers do not own infrastructure at 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 on 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 and 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,” outlines 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 (e.g. security, lighting) might have to be set up again with a new provider.”

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 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 prize. For utilities, climate control is the obvious entrance 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 including 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.

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," said David Watson, president and CEO of Comcast Cable in an 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, senior director, product marketing at 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.”

Parks Associates reports that devices are getting more complex, using more sophisticated apps and increasingly integrated with other devices and smartphones. That could mean more than half of consumers will seek post-sales support for deploying their new connected IoT device.

Trudelle adds, “To ensure they’re enabling their customers to be secure, providers can provide a lot of support, such as performing behavioural analysis of the home network by applying security heuristics and analytics on the broadband gateway.”

Research conducted by Futuresource in the UK, France, Germany and U.S 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 the least trusted. Pay TV providers come in the middle of the research’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. 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 with pay-TV and broadband can reduce the initial SAC (subscriber acquisition cost), which can provide the pay-TV / 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.”

There are warnings for those who don’t. 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 be speak to a wider factor in convincing the UK market of the economic benefits to such devices. In a Deloitte survey of last year 48 percent 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 needs to be bundled at attractive price points. According to another Futuresource survey, 55 percent of all consumers who have not adopted Smart Home explain 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 independent solutions or part of quin-play services, such solutions are likely to remain niche products that the largest operators with established infrastructures can leverage, suggests Trudelle.

He points to the option of building Smart Home services on top of the infrastructures which service providers already have in place 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 which “at least some consumers are willing to pay a monthly fee for,” according to Philpott, “service providers will need to be more innovative to create mass-market propositions.”

A service provider might be tempted to create its own ecosystem among other things to keep exclusive ownership of valuable usage data. However, the R&D costs involved will be 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 different interfaces.

This field is increasingly competitive and fragmented. Amazon (Alexa) and Microsoft (Cortana), along with vendors like Apple (Homekit & Siri) and Samsung (SmartThings), are upping the ante with increasingly popular hub products.

Google’s Assistant, for example, will be installed on Logitech Harmony remote controls, smart lights from ADT, Xiaomi, and IKEA, window treatments from Hunter Douglas, air conditioners and humidifiers from Hisense, televisions and other appliances from LG, and security cameras, alarms and door locks, from Arlo, ADT, First Alert, Vivint, August, Schlage, and Panasonic. As of last month this included the Hopper STB from U.S network Dish, too.

This could mean an opportunity for service providers – if they can provide the user experience and single trusted interface – the grail of gateway to the home.

 “Consumers will want to interact with 1-2 interfaces that are easy to use and facilitate interoperability among devices,” says Oliveira.

Swedish service provider Con 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 informing building tenants of a meeting, operational instructions for appliances or when the communal laundry room is free. This lo-fi start, aided by 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 Con 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.”

Choosing the right use case

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 streaming video to a monitoring service for action; provision of remote and automatic control of a home for things such as heating, ventilation, and air conditioning (HVAC); Smart metering for monitoring the energy efficiency of appliances; and digital health services such as remote consultations.

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

Analyst ADL however segments the market a little differently. It brackets home security with energy and utility management under Home automation and sees these services centralised on a unique user interface. It forecasts a 6 percent annual growth rate for these services until 2020.

The configuration, maintenance, repair and support services available for digital home devices, such as PCs, TVs, game consoles and networks is another Smart Home market expected to grow at 5 percent CAGR until 2020.

It also earmarks the e-health sector as an opportunity for telcos to offer “a unique cost control lever for health stakeholders by dematerializing some healthcare components.” Since a wide variety of players including device manufacturers and big pharma are entering the market the value sharing mechanism “is highly dependent on standardisation scenarios” making the market potential for operators uncertain.

A fourth category marked by ADL is Home Cloud. This market is driven by the increasing amount of data, mainly video, leading to a strong demand for remote storage and access. It’s a market it predicts will grow at a remarkable 50 percent per year. To grab a piece, telcos operators will need to leverage their customer trust, as well as their reliabilities and existing infrastructure, advises ADL.