Market for smart home systems by market segment

By looking at annual system shipments in 2012, one immediately gets a sense of the bifurcated nature of the home automation market. Just more than 103,000 custom-designed/custom-installed systems and 166,000 DIY systems were shipped during the year. However, approximately 1.35-million homeowners opted to have a basic system installed by a telco such as Verizon or AT&T, a cable operator like Comcast or Time Warner cable, or, to a lesser extent, an electric or gas utility like British Gas. Home security companies account for much of this figure; ADT now has around 190,000 subscribers for its Pulse system and witnessed phenomenal growth in new customers between 2011 and 2012. Likewise, Alarm.com, which provides its home automation platform to thousands of security dealers, continues to lead the way and hit the 1.4-million customer mark at the end of 2012. The company was estimated to have less than a million accounts at the end of 2011, making its growth very impressive. All of this shows that a mainstream market is starting to emerge at last.

By 2017, it is expected that the awareness generated by the entrance of the aforementioned service providers will boost all three market segments. Customers who were previously clueless as to what home automation entails will undoubtedly see the benefits of what the technology can do for them and sign up for some kind of solution. Some will first opt for a basic DIY or managed solution from a service provider and then upgrade to a more sophisticated custom-designed/custom-installed system after getting a taste for home automation in general. Despite this and also falling system costs across the entire ecosystem as demonstrated in Table 2, the DIY and custom-designed/custom-installed solutions will both remain niche market segments throughout the course of the forecast period. The connected home segment will grow quite quickly at a compound annual growth rate (CAGR) of 50 percent between 2012 and 2017 to reach 10.7-million shipments in five years.

Revenue growth during the five-year forecast period will be much less than unit growth due to a gradual decline in active server pages caused by a number of factors. First, as more service providers enter the market, competition inevitably increases, and prices are cut. As an example, Comcast has introduced a new package priced at $9.95 per month (previously the company charged between $29.95 and $49.95 depending on the solution chosen). Clearly, the cable giant is positioning the new system to compete with lower-cost alternatives from Lowe’s and Verizon. Second, as sales volumes increase, prices go in the opposite direction. As home automation technology gains traction, both monthly recurring fees and also initial equipment and installation costs will begin to slide. Third, overall system costs are falling due to the advent of cloud computing, use of tablets as the home’s chief user interface, and the emergence of wireless technologies that allow homes to be retrofitted more inexpensively than was previously the case.

Overall, we expect shipments of home automation systems to increase from almost 1.7-million units in 2012 to 12.2-million units by 2017. During the same timeframe, revenues from the sales of these systems will increase from $1.9 billion to $3.8 billion.

In addition to hardware and associated upfront revenues from the sale of home automation systems, the bigger long-term revenue opportunity will come from associated revenues. At current estimates, there are about 2.7-million homes worldwide using a home automation software platform managed by some kind of service provider, be it a home security company, electric or gas utility, or telco or cable operator. While the entrance of these entities is, of course, a boon to the segment and industry as a whole, it is not definitive proof that the smart home is now mainstream as many mistakenly believe. Indeed, putting Alarm.com’s security dealer network aside, the next biggest service provider is ADT with around 190,000 Pulse subscribers. That said, more and more companies are announcing that they are offering home automation technology, and as awareness continues to grow, this number is set to increase quite substantially over the next few years. By 2017, there will be close to 35-million homes using home automation platforms supplied by service providers across the globe, resulting in $10.9 billion in worldwide service revenues.

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