After the disappointed promises of home automation in the 1990s and 2000s, rising environmental concern looked like the factor that could trigger mass-market adoption of smart home concepts. Except that no consensus existed on the deployment model.
Equipment sales or services, with or without cross-subsidy; energy-focused features or multi-service platforms; new build or existing housing; professional installation or plug and play. That heterogeneity reflects diverging analyses, but also well-understood differences in competitive advantage. They cannot all be right.
Five readings of the same market
- Equipment makers expect very gradual deployment, paced by construction and major renovation. Their model stays centred on equipment sales, with sophisticated solutions requiring specialist installers who are themselves their natural prescribers. Frequent use of proprietary protocols, designed to lock in the whole solution, raises costs further and makes payback on energy savings alone harder to reach. Their strength is energy credibility and customer access.
- Pure players aim instead to minimise the barrier to entry: lowest possible equipment cost, open standards, low-cost country manufacturing, installation without a specialist. Their target is a services model with recurring revenue. With the economics not yet working, these solutions remained confined to early adopters.
- Large service operators, telecoms and banks, seek synergies with their core business. They hold a cost advantage on customer acquisition and connectivity, and a cross-subsidy model: the expected life of an internet customer could lengthen by several months if they also take a smart home offer. Their view is nonetheless shaped by a technology product obsolescence cycle of around three years, far removed from the academic energy efficiency logic where building-linked investments pay back over ten years or more.
- Information technology specialists anticipate models built on data monetisation: an advertising extension for Google, B2B management of smart meter processes and data for IBM, home network exploitation for Microsoft.
- Energy suppliers see an answer to commoditisation risk. In a market of rising prices and thin margins, the commercial pitch must shift from the price of energy to the ability to optimise the bill. Smart homes are the preferred instrument of that repositioning, and taking a position is imperative given the risk of disintermediation.
What is actually blocking it
The record of early deployments remained mixed. Several constraints compounded each other.
Analysis often pointed towards commercial buildings or new-build collective housing, where each euro invested goes further thanks to scale and standardisation. The financial crisis had also cooled large players, banks and telecoms operators alike, whose latest broadband routers carried no home automation capability.
Above all, technical architecture choices determine customer acceptability, and objections were numerous: the intrusive nature of the devices, fear of losing control, comfort loss perceived as the price of a lower bill, sensitivity around consumption data privacy, and health concerns tied to radio communications. The precedents were concrete: a Dutch parliamentary refusal in 2009 to endorse mandatory smart meter roll-out, and a moratorium obtained in California through a consumer class action.
One final and decisive constraint: energy prices too low for the economics to work.
Which killer application?
Demand response long looked like the trigger application. Yet doubts were emerging about the sustainability of a business model resting on that service alone in mass markets. It remains attractive as a first proven block of value on which to anchor a technical platform.
Other candidates were emerging outside energy: home security monitoring, a mature but limited market, and above all assisted living for the elderly, whose demographic fundamentals pointed to a major market.
A disruption hypothesis
Our view was that smart homes would find their momentum in the commercial and contractual integration of energy supply with energy efficiency solutions, around a residential adaptation of energy performance contracts.
Over the medium term two factors were set to pull the market along: mass electric vehicle deployment and significant distributed generation penetration, both requiring smart home solutions. Over the longer term, a proliferation of connected households that both consume and produce could lead to real-time supply-demand matching on electronic marketplaces.
In every scenario, this movement foreshadows the disappearance of the electricity and gas supply business as it then existed.
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