The Smart Home is Stuck

on May 12, 2016
Reading Time: 3 minutes

Alphabet’s Nest subsidiary has been in the news recently for all the wrong reasons. Whether for unpleasant management styles, uncomfortable financial belt-tightening, or a failure to hit annual targets. All this has many people asking why Nest, which was the darling of the smart home market before its acquisition by Google, seems so stuck. I think the answer is that Nest is mostly a victim of the current state of the smart home market, which itself seems perennially stuck in the early adopter phase.

A category in search of a problem

The smart home and home automation category has always been a solution in search of a problem. For the vast majority of people, there’s no desperate yearning for something new to come along and replace their thermostat, refrigerator, lighting, doorbell, or baby monitor. Most of these things are well established, work just fine, are reliable, affordable, and easy to use. Replacing these items with more expensive, less reliable, more complicated technology just doesn’t sound like a good idea to most people. There are, though, people willing to buy and use these technologies, and a number of companies have benefited from the openness of these early adopters who want to spend lots of money on gadgets for their homes.

Some exceptions have crossed over

Some exceptions to this pattern have crossed over to the mainstream. Those exceptions include – to some extent – Nest’s original product: its thermostat. That device meets several key criteria which make it unique in the broader home automation category:

  • A small number – in some cases, just one – are needed for the average home
  • The installation is somewhat intimidating but doesn’t require complex electrical skills
  • There is a promise of a clear return on investment from smarter use of the home’s HVAC system

Straightforward installation, a whole-home solution with few constituent parts, and a return on the cost of purchase are not claims many other smart home solutions can make. That has allowed the Nest thermostat to sell better than most products in this category (indeed, it’s about the only smart home product in the new home I built a couple of years ago). Other product categories require electrical expertise, devices to be installed throughout the home, and cost a lot of money with increased convenience the only real benefit.

Maxing out a series of small markets

The challenge, then, is the addressable market for most smart home technology is pretty small, composed of innovators and early adopters in the classic technology diffusion curve. As a result, many products are attempting to squeeze every opportunity out of these small markets until they’re maxed out. Nest has been criticized for not innovating more around its original product but I suspect this is the result of a deliberate strategy to saturate many individual product markets rather than focus on ongoing significant improvements in a single market. This helps to explain Nest’s acquisition of Dropcam, its smoke and carbon monoxide detector, and the other products it’s been rumored to be working on. There’s more mileage in opening up new markets than there is in squeezing incremental value out of existing markets already nearing saturation.

Alexa as a smart home device is a red herring

I see some people referring to Amazon’s Alexa as a more mainstream smart home or home automation product, and I think that’s actually a red herring. Yes, it can be used to control smart home devices but I suspect (a) only a subset of Alexa devices are used for this purpose and (b) such a focus would limit its appeal to a niche within that smart home early adopter category. I think Alexa’s potential is much broader than that and it’s precisely because it isn’t just a smart home controller. Alexa isn’t extending the smart home market – it’s more mainstream precisely because it’s not limited to that small and limited opportunity. Having said that, it likely appeals to the same sort of early adopters as smart home products do but it appeals to others as well and that’s its strength. This is also why others will likely follow Amazon into this category even as the smart home market continues to fizzle – it shows more short-term promise.

Nest’s challenge

Nest’s challenge, then, isn’t just the internal struggles within an Alphabet subsidiary but that the smart home market has failed to cross over into the mainstream. As such, Nest’s addressable market is limited. It can expand its opportunity by moving into new sub-categories of the market but those are being competed over by more and more companies eager to tap into these same opportunities, which makes its path ahead even more challenging. I’ve written before about some of the things that can help unlock a larger smart home market but most of the short-term challenges are here to stay. That’s going to make life tough for Nest and any other company that makes its money selling smart home gear.