Earlier this year Google (NASDAQ:GOOG) (NASDAQ:GOOGL) spent $3.2 billion to buy Nest Labs, which makes the Learning Thermostat and a smoke and carbon dioxide detector called Protect. These two devices provide a nice foundation to a home automation system. There's just one problem, the center of most of today's home automation systems, the security system, is missing from Nest's offerings. That's why if Google wants to compete in this market then it needs to offer its customers the full package.
My wife and I recently moved into a newly built home in a quiet suburban community a few miles outside of town. One of our first visitors was a salesman from ADT (NYSE:ADT). He wanted me to sign up for ADT's home security system. It's something I'd never really considered before so I took the information and said I'd review it.
Soon thereafter we had two more visitors, both wanting us to purchase their home security systems, which of course were better and cheaper than anything ADT had to offer. That of course got me curious as to what was out there and if we really needed the extra bill each month as this was known to be a safe community. However, apparently one of the reasons the community is so safe is because nearly all of our neighbors are paying to keep it safe as virtually every house has a sign noting that it's protected by a home security system. Needless to say I don't want to be the odd man out.
What I discovered
I discovered three very interesting themes in my research. First, home security is a very, very fragmented market and while ADT is the top dog with 6.5 million customers and more than $3 billion in revenue, there are at least a half dozen other home security options in my community alone. However, while all offered home security monitoring, it was tough to get an apples-to-apples comparison. What seemed to be the deciding factor for most people was being "sold" the system either by word of mouth or a compelling salesperson.
The second interesting theme in my research was the rise of disruptors to this system. "Do-it-yourself" security systems like Iris, which is offered exclusively at Lowe's (NYSE:LOW) or SimplySafe gave consumers a new alternative. These systems were installed by the consumer and came with a much cheaper overall cost as the monthly monitoring services were a lot less.
The final theme I discovered was that most of these companies offered some form of home energy management as part of a total the home automation package. For example, ADT's Pulse service allows its customers to adjust their thermostat remotely, much like Google's Learning Thermostat. It also enabled customers to turn off lights or appliances remotely so that they can save on their energy bills. ADT's Z-Wave technology unifies home electronics into an integrated wireless system, which could be used for both security and energy management.
Add it all up
What I found was a highly fragmented market that is slowly being disrupted by new technologies, which are increasingly focusing in on the total package of home automation. This could potentially be a real sweet spot for Google because it could take Nest to the next level by creating a full home automation system around those two devices. The only thing that's missing is the security system, which is where Google could provide a big disruptive impact.
In comparing "do-it-yourself" rivals, Google's technological lead already gives it a leg up on the Iris offering, which can only be purchased at Lowe's. The system, which offers both home security and energy management, was poorly reviewed by enough customers on the Lowe's website that I didn't feel comfortable purchasing it for my home.
Further, the system's programmable thermostat actually needed to be programmed-as opposed to Google's Learning Thermostat-which is easier said than done as I still haven't gotten our programmable thermostat optimized yet. Meanwhile, SimplySafe's security system is enthusiastically endorsed by its customers, but it lacks the energy management aspect that I would love to add to my home.
Needless to say my options are to lock myself into an expensive long-term contract with a company like ADT, purchase what appears to be a still emerging Iris system from Lowe's or do without the energy management side of things and opt for SimplySafe. That makes it a difficult choice for me and so many other consumers. It's a choice that could be made a lot easier if Google would simply expand its nest and start protecting homes too.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.