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April 26, 2018

Striving for the Top of the Food Chain in the Smart Home’s Explosion

MHT Partners  | Consumer Investment Bank

The past two Consumer Electronics Shows have been defined by smart speakers—the Amazon Echo in 2017 and the Google Assistant in 2018, and those are just the tip of the smart home iceberg. Apple’s recent entry into the market makes it the final hardware-producing FAANG (Facebook, Apple, Amazon, Netflix, and Alphabet’s Google) member to join the competition, and the countless consequent devices designed to interact with the budding universe of smart speakers means that there is no shortage of gadgets for eager consumers to integrate into their home ecosystems. This explosion of smart devices brings the Internet of Things (“IoT”) one step closer to household ubiquity. That is, we are accelerating towards a future where the interconnectedness of each part of the home—from our speakers to our locks—is so commonplace that we don’t even think about it, just like we no longer think about the number of electric appliances in our homes.

In this brave new world of talking toasters, however, the ultimate prize for Amazon, Google, and Apple is not producing the best-selling smart speaker. Rather, the real reward is owning the operating system (“OS”) of the IoT. That’s Alexa, Google Voice, and Siri instead of the speakers that sit in your corner. Companies seek to own the OS because as technology becomes increasingly available to consumers, hardware is commoditized (see Moore’s Law), while the OS remains an infinitely scalable intermediary between the hardware and all of the software, not to mention the first customer touch point. Additionally, operating systems create strong network effects. That is, as an OS attracts more consumers, increasing numbers of hardware and software developers build their products for the OS, further entrenching the OS’s value at no cost to the OS provider. Think of Microsoft’s cash machine as Windows rose to personal computing dominance in the 1990s versus computer manufacturers’ constant, painstaking race to cut costs while also improving product quality.

An OS for the IoT dovetails with each major contender’s corporate strategy in unique ways. Running the home would make an Amazon shopping cart ambient. Realize you’re almost out of paper towels as you clean up a spill? Ask Alexa to order more, and they’re on your doorstep tomorrow, assuming you have Prime Delivery of course. For Google, the world’s largest marketing company (serving about 30 billion impressions per day), a commanding position in the home would make the data that it sells and mines that much more robust; it would also complement the company’s Nest Thermostats, which are already a cornerstone of many modern homes. Finally, Apple occupies a slightly different lane in this race. Keeping with its heavily integrated, high-end product strategy, Apple is not selling its Home Pod at a loss, and it is not nearly as quick to open the Siri Home OS to every “smart x” manufacturer in Shenzhen as Amazon is with Alexa. The Home Pod is yet another stake in Apple’s integrated ecosystem, the heart of which is the iPhone.

At this junction, then, all of the key players in the smart speaker industry have defensible, differentiated motives to control the smart home’s OS. A key question, however, is whether there will actually be a dominant OS for the IoT. Benedict Evans, partner at Andreessen Horowitz, asserts that the answer could well be “no.” His argument is two-pronged.

  • First, if smart technology’s ubiquity is the end game, will people need to interact with their connected devices at all, let alone through smart speakers? Consider smart locks, for example. If we want them to automatically unlock our doors as we approach our homes and lock them as we leave, wouldn’t our phone’s OS be a better contender to control our locks than the OS that tells us what is running low in our fridge?
  • Second, very few people are going to invest in every piece of a smart home all at once. This means that while it is easy for people to say “Wouldn’t it be nice if every part of my home were connected?” it is much more difficult for most people to say “I’m going to buy a new refrigerator, television, dishwasher, dryer, and redo all of my light fixtures.” Smart device manufacturers realize that many consumers are not fully integrating their homes, at least not all at once, and are consequently creating contraptions that can stand alone as customers’ sole smart machines. This array of ecosystem-free devices runs on countless different operating systems, which means that the smart home OS status quo, while flush with dominant players, is still heavily fragmented. The smart home ecosystem, then, does not necessarily need to be unified by a singular OS and is currently distributed across countless operating systems according to the whims (and demands) of each individual hardware manufacturer.

Today’s fragmentation may give way to tomorrow’s hegemon, such as when Windows rendered DOS and IBM/OS obsolete, but the future is far from certain. Thus, while many of tech’s high-powered players have stepped up to the plate, the game for in-home IoT dominance is still in its early innings—and it isn’t even clear whether there will be a winner.

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