No one who attended CES 2016 needed glasses to see the writing on the wall: The connected home is real, and whoever figures it out first is in for a considerable payday.
At last month’s TWICE Executive Retail Roundtable, held each year at the show, top industry merchants examined the barriers to mass home-automation adoption; the eventual impact it will have on custom installers and integrators; and how to maintain margins as hardware retails fall.
Suggestions included a subscription model to capture a recurring revenue stream, and an upfront IT support fee that’s built into the price point.
But regardless of which path the industry takes, it is certain to be a challenging one; as the Roundtable panelists observed, even the brightest lights of the tech industry — Google, Apple, Microsoft, Amazon, Samsung, et al. — have yet to tame the IoT beast.
An edited transcript of the discussion follows.
TWICE: Walking the show, you can’t help but sense a major structural change coming to this industry in the form of connected product. This could be an entirely different business in three years.
Ryan, we know Sears has been working diligently to get ahead of the home-automation curve, but has the consumer caught up yet?
Ryan Ciovacco, president, connected solutions/CE, Sears Holdings: We had this conversation here last year and I don’t think a lot has changed. There are still the basic hurdles. People are still worried about security; the price points are still pretty high; the value proposition is not entirely there; and the other part is the fact that the products don’t all work together.
Those are the biggest hurdles right now, and I don’t think in 2015 we really overcame those. Wearables are hot, people love them, but they are still taking them off after 90 days. It really comes down to whether we can sell the solutions, and that is what we have tried to do: sell energy management, sell security, sell to the busy mother.
We have had a lot of success doing that last year. We opened our Experience Center in San Bruno [California]. It’s a 4,000-square foot area [within a Sears store], basically a home with a bunch of vignettes, kitchens and living rooms. That is the way you will have to sell it. We are seeing that, and most retailers are seeing that they can’t sell it as a video or just a box on a shelf. You have to be able to sell the full solution.
TWICE: Which categories are going to drive this into the mainstream? Will smart refrigerators ultimately be the spark?
Ciovacco: Right now the one that we see having the biggest value proposition is security and peace of mind, so cameras, lighting, that sort of thing. Also energy management, a Wi-Fi thermostat, because you can see that you are saving money. I don’t know how many times I have actually turned the temperature up or down with my phone, but I can tell you that I see the report coming through showing me how much money I’m saving.
The same thing with the cameras: letting your dog walker in and locking the door. Those things are more important and are a better approach than convenience. Convenience is faddish.
Dan Schwab, co-president, D&H Distributing: What I see is that there are so many amazing Internet-connected devices — every appliance manufacturer is coming out with products — and I think that is going to continue to accelerate.
To your point, Ryan, the universe today is not as interconnected as we hoped it would be a year ago, but there are solution-based models that accelerate it. Security and energy management are key ones, but if our industry could come out with the one killer app or killer product that everyone has to have, it’ll drive the migration path that everyone is going to have in their homes. That is the thing that is missing.
Some are using it for healthcare monitoring; others are using it for different usage models. That is where it is sputtering along. A lot of times when you have a new capability such as this, you see one common theme that everyone gets. It’s like when the first smartphone came out. All of the sudden at that point everyone got it and all of the sudden it started proliferating. If there is that one technology that everyone feels they have to have, that will accelerate it.
Fred Towns, president, New Age Electronics: This is an area that we are looking at very carefully. We are working with one of your products Laura [Orvidas, VP CE, Amazon] quite well because the voice aspect of it is very cool.
TWICE: Alexa?
Towns: Yes, the Echo system is very convenient.
One key though that Dave [Workman, president/CEO, Pro- Source] said in the past is having products all be friendly and work with each other, and picking the right standard so that people are going to be able to utilize the products.
I think where the confusion occurs is that one protocol for one system doesn’t necessarily translate to another system that might be out in the market, so consumers are saying, ‘Well, show me which one works with which one so I can turn my lights on, add a lock to my door,” and others things like that, and that is still an area of concern. I’m sure at Sears you are wrestling with that also.
When we look at Nest and others, and you have someone coming in and installing Nest units saying, “Well, there is a whole other ecosystem that will tie into this and we are working with them,” then you start to look at smart devices, watches and other things, that tie it all in. At some point though you will have to drive them with some kind of storage service system and security system in the home, whether it comes in through a router or another modular box in the house to make it convenient, and then uploading that data to somewhere safe. There are still problems that are not clear yet for the consumer.
David Workman, president/CEO, ProSource: It’s a long way away from being able to walk down an aisle with a shopping basket at Home Depot, and load up and outfit your home with all of the smart devices. Probably the number- one objective of our group is trying to figure that out. It is really messy. There is so much coming with companies driving the technology down, but we see it still as an assisted sale for some period of time.
The challenge for our CI dealers is how do you embrace the lowering of the price point, and now, how can you build a ticket past that to have a very long tail on the transaction with other devices and follow-on sales?
At some point it will take on more the fashion of the security business, where for our dealers to be profitable in it, they are going to have to have some recurring revenue piece that comes along with it. Once you get the stuff in, there is monitoring control to keep the system running and a lot of service, much like a security system.
Fortunately, it doesn’t look like you have to go 39 months before you can pay for the hardware under contract, but one way or another for our dealers to remain profitable in the category and handhold the customer, they are going to have to think about their business differently.
Second, we have obligations to build different business models. The technology is coming, and that is one of the top things we are looking at at the show — a lot of this stuff and how we can integrate it into our dealer base.
Rick Souder, merchandising executive VP, Crutchfield: So far the theme of the show has been, “Here is our new ‘whatever,’ a generally traditional device, and it is connected. We’re not exactly sure what is going to happen when it gets connected or what it will do, but it is connected.” Build it and they will come, I guess.
I think the business is real, the benefits are real, and the demand is there. Just about anybody you talk to says it is really cool. Whether they will make the investment or want to get involved in the time it takes to set it up, who knows? There are going to be a lot of false starts along the way.
David Pidgeon, CEO, Starpower: There has been a lot of over-stepping. While the new generation is tech savvy, the middle crowd and the older crowd want it and can afford it too, so they are willing to pay for you to do it.
What they get most frustrated with though, is once you have installed it and there is a problem, everything breaks loose. They have to have it fixed, and they have to have it fixed now because they become glued to whatever it is they are trying to do, whether it is streaming or audio throughout the house. But they don’t understand all of the nuances, in that you could have interference going on with your Wi-Fi and things like that.
They have kind of embraced it and said, “Yeah, I need that. I can afford it, and I want it.” So they put it in, and then they go to use it and can’t really use it. Whereas the younger crowd, the new age that is coming, has learned how to attack their own issues. They look it up on Google and find out how you fix it. I don’t think that my age group and older has figured that out yet. We just want somebody else to do it, and we are willing to pay for it.
That is really what our industry has to figure out on our end, how to embrace that and give the customer that service level, because as Dave said, the prices have continued to go down as have the profits. Figuring that out and getting the middle-aged customer comfortable is the biggest key.
Workman: There clearly is a higher expectation. With the smartphone in general, whatever the demographic, there is a higher expectation that the technology has to work for you, rather than you working for the technology for it to succeed. Just think about how technology has transcended the old days of the computer and complicated programs that didn’t work together and the other stuff, vs. the convenience of an app and a tablet.
Apple has done such a masterful job of really understanding that all of the magic should be in the background. All you need to do is push a button and something happens. That is an expectation that the consumers have now. When we bring new products to market, it is unrealistic to think that they are going to go through some painful learning curve. Those products will fail quickly.
Towns: Mass appeal for technology to get out has to be that the user doesn’t have to subscribe all of the time.
Workman: Yet they keep signing up for new subscriptions. It’s the drug you can’t get off of.
Stephen Baker, industry analysis VP, The NPD Group: What we hear and see is that it is great to solve this stuff, but some of the struggle and the reason why some of these things haven’t been as successful is that they just don’t solve a problem.
All sorts of incremental services on subscriptions and everything else … you are going to have to see more of that. On the flip side, you hear about AT&T which is trying to do this and has a big chunk of infrastructure in place. Yet they are struggling to get traction, which may be for other reasons, but another big piece of a bill on a monthly basis? On the one hand people struggle with it. On the other hand, you can’t make these things successful if there isn’t some other kind of curve.
I’m going to take that and go all the way back to the biggest challenge we all have thinking about hardware, that the hardware price is going to go down. Margins are always tough. In the old days you had recurring revenue streams against content and all sorts of other things. Today it is hardware value continues to decline, but the service pieces to be able to make money on the subscription side, those aren’t materializing in the same way as they used to. That is fundamental.
We can’t change unit volume, product mix and those things, but we have to find a way to make the value proposition better for people so that you don’t just buy it and forget about it. There has to be some kind of recurring service, warranty, something that somebody can make money with and be successful on.
Workman: The whole idea of a warranty has gone away, and you have to have value there. The customer has to recognize that value. You can’t just say, yeah, $30 a month. They have to recognize it, and it has to resonate that there is value.
Souder: I really thought that Google would quickly create large ecosystems of devices that work together, and the fact that they haven’t just shows how difficult it really is from a technical standpoint. That, or they can create them and the economics don’t work. I have no idea, but I would have thought that those ecosystems would have progressed much further than they have.
Towns: Google has brought the Nest group in, but it’s kind of like off-campus. It is a group that operates very differently than the rest of Google.
Ciovacco: They are still integrating with all third parties.
Towns: The biggest challenge in this whole area is the integration of other brands. We are looking at the brands that we carry. Do they support the ecosystem- type products that we support also? That is really the challenge.
I hate to use the old analogy of Beta vs. VHS, but it is kind of stuck there because some systems are going to make a choice of whether somebody gets one system or another, and there are many different models of where it can go as far as support and other things.
I’m starting to wonder if at some point the technology builds a price in for customer service or support. Could that be a trend, where if I buy this I know I have two years of service? That I can call up and get answers and they can help me walk through a problem?
Maybe two or three years down the road there is going to be new technology I will replace it with anyway. It is no longer going to be the thermostat that you stick in the wall and it’s there for ten years. It’s going to be upgradeable, and software downloads and other things are going to change it. Anything that is tied into the Internet is going to have a certain shelf life. Is there a way to support infrastructure around it to say if you have a problem, we will walk you through it?
Workman: That is the biggest challenge. It isn’t a one and done, you sell it and wave good-bye. You can pretty much count the returns at that point. It is going to require getting all of the parties in the room, the vendors, and developing a hand-hold solution for the consumer to guide them through.
It’s not going to be perfect. As Rick said, by now you would think that Sony, Samsung, Apple, Microsoft, Amazon, whoever, would have this complete ecosystem mapped out with a plug-andplay mechanism for the consumer. It is obviously a lot more difficult than that because nobody has really been able to get as far as they need to. The energy comes from these small start-up companies almost, and there are a lot of little cottages out in the village.
One way or another we are going to have to round everybody up and try to figure it out so that the consumer experience ultimately is satisfying. Right now it is messy.
Towns: As you said, every one of those brands you mentioned is working on it.
Workman: That has been the domain of the CI guy, to figure out all of those rough spots in the road and have a very highly assisted sale, but it has come at a very high price. The influence of technology is that things are coming down in price, but it is still very complicated in its essence.
Laura Orvidas, VP CE, Amazon: One of the exciting things, at least anecdotally, is that if I look at my universe of friends, I see a lot more connected devices in the home than I did a year ago.
I also just walked through a new model home construction, and they had wired it for a connected home and had light bulbs that are speakers. With more exposure to the technology, consumers will be more comfortable with adopting it, especially as they see the use cases.
I agree that it is still confusing and messy, and compatibility is a big issue. We are really working with our Amazon Echo and Alexa technologies to have a voice and be one of the simplifiers, to be able to connect up with a lot of different devices. Echo right now is compatible with Philips Hue, Samsung Smart- Things, Wink and other connected devices, so that starts to make it a little bit more of a simplified platform. Echo was one of the most gifted items this holiday season.
TWICE: Confusion offers opportunities. Whoever can figure this out is in the catbird seat.
