Cloud-based smart home installed base to grow to 44.6 million by 2018

Key elements of growth: platform that can integrate many devices, resistance to cyber hack
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Wednesday, May 28, 2014

LONDON—The security industry is just one business sector expected to play a role in the rapid expansion of the global market for cloud-based home management systems, whose installed base is poised to skyrocket over the next five years, rising from 5.6 million at the end of 2013 to 44.6 million by 2018, according to a new report from IHS Research, a market research firm whose U.K. headquarters is based here.

During that forecast period, the installed base of cloud-based home management systems is expected to rise by a factor of eight, the report noted.

Broader smartphone adoption has been a key enabler behind the smart home market, according to Lisa Arrowsmith, associate editor, connectivity, smart home and smart cities, for IHS. She adds that moving forward, there are many factors behind the steep projected growth of cloud-based home management systems. These include the transition of the existing installed base of high-end home automation systems to support this functionality, along with the rapidly growing emergence of mass market providers.

Cloud-based home management systems have an array of applications, encompassing everything from lighting control and energy management to home monitoring and independent living services—which are just some of the offerings included in an ever-expanding list of applications.

The market has a diverse range of participants that includes hardware manufacturers, energy companies, cablecos and telecoms and physical security companies, among others. Given the disparate players, it’s no surprise that companies are packaging and monetizing home management solutions in a variety of ways, Arrowsmith said.

For security companies, the tried-and-true recurring monthly revenue model remains a promising option for several reasons, she said.  

“The recurring billing model fits in well with many companies’ core business lines,” Arrowsmith noted. “A lot of these companies are set up well for these monthly payments and for having that kind of a relationship with customers.”

Arrowsmith said certain metrics for how companies measure success, such as average revenue per customer, are of major importance to companies following an RMR model. In that context, a cloud-based home management can be viewed not only as a means of boosting average revenue per customer, but also as a means of reducing churn, she said.

That increased “stickiness” becomes crucial if it keeps customers tethered to more lucrative offerings, such as a monitored security system.

“In certain cases, [companies] might not make as much money on the home automation side, but if they can use it to tie their customers into their core business line where they have a good profit margin, then it can still be beneficial,” Arrowsmith said.

This dynamic rings especially true for the North American market, where home security and home monitoring are a “very key element of the smart home,” Arrowsmith noted. In the North American market, many companies tend to view security services as the foundation of the value proposition, using these offerings as “the gateway into the home,” she said.

“From then on, they add energy management, lighting control and other elements,” Arrowsmith said.

As far as what could curb the lofty growth projections, Arrowsmith pointed to user interface fragmentation as a possible impediment down the road. She offered an example of a scenario that could become more commonplace as adoption expands. Early adopters of home management systems, for instance, might have the basics like lighting control and energy management covered. But in the future, if those early adopters want to incorporate more cutting-edge services—such as household appliance apps—into their platform, but are unable to do so, the overall value proposition could take a hit, Arrowsmith said.

“A lot of the value is lost if you don’t have interconnectedness,” she said. “Consumers want a single unified experience.”

Cyber security concerns could also potentially curb growth, Arrowsmith said. If a hack were to generate broad press coverage, the industry could find itself thrust into a “PR nightmare.” However, she noted that a company’s ability to address such a challenge could become a market differentiator, with some companies separating themselves as they implement more robust network security measures.

“Some systems may have the potential to be exploited, but it’s not ultimately going to be a barrier,” Arrowsmith said. “It’s not beyond the industry’s technical capabilities to resolve.”