A smart home is something of an emerging concept. However, it's got a lot of supporters because more intelligent homes open up huge possibilities when it comes to automation, security, and energy use. In fact, making your house a smart home can even lower your insurance bills. The benefits are so numerous that companies like Honeywell International (NYSE:HON), Siemens AG (NASDAQOTH:SIEGY), and even Google Inc (NASDAQ:GOOG) are rushing to build momentum in what could be the new future of all homes.
What makes a smart home?
Juniper Research recently pegged the smart home market at $25 billion in 2012. Allied Market Research, however, pegged the market at around $5 billion in 2012. What gives? The difference is what you include in "smart." For example, Juniper included such things as web enabled televisions; Allied didn't.
That said, Juniper's estimate that the industry will nearly triple in size by 2018 (to around $71 billion), is probably at least directionally and scale wise correct regardless of the actual dollar values you use. And while you can argue over a Netflix streaming TV being smart or not, your thermostat and home security system are far more clear. These are spaces that Honeywell, Siemens, and Google all want to play in.
They are also the areas that industry watcher Digital Trends believes will be the most frequent smart home purchases within five years. And there's plenty of backing for this. For example, Tim Arone, a VP at Pure Insurance, told Smart Grid News, "If somebody has some sort of temperature monitoring system in their house, we give them a discount for that." State Farm has been offering similar discounts since 2013. And some utilities are even providing customers with free smart thermostats to test new ways of cutting energy consumption.
So this looks like it could be a big market, particularly when there's such an industry push for it. And, importantly, the benefits flow down to consumers. Saving money on insurance and reducing utility bills being prominent ones beyond convenience. That's why Google bought Nest, a maker of high-tech thermostats, for $3.2 billion. It might seem odd for a company like Google to be interested in how your home gets heated, but it isn't as weird as you may think. For example, a company called Opower Inc bases its entire business around analyzing energy use patterns of utility customers.
One of Google's biggest strengths is analyzing data — every time you do a Google search, for example. Opower believes the utility market is a roughly $11 billion annual opportunity. No wonder Google wants a seat at that table. And if Google is true to form, it will find a way to put the power of your data in your hands, too.
But more traditional names in the home space are working hard to carve out leading positions, as well. For example Honeywell and Siemens are both pushing high-tech thermostats. But there's so much more going on. Honeywell's products can allow you to remotely control your home's temperature, ceiling fans, home security system, lighting, window shades, and even your door locks. Siemens is thinking along the same lines. And you can even use your smartphone to control your smart home.
Leading the way
But it's Honeywell and Nest that appear to be taking an important leading role in the market. In the middle of 2014, Terapeak Trends analyzed search and sales data on Ebay to see which smart thermostats were gaining the most traction. This pair were the clear winners, which is notable because Nest is basically an upstart and Honeywell a long-established name. Terapeak's take on the trend: "Nest and Honeywell appear to be neck-and-neck. Both Nest and Honeywell sales are up over this time last year, but the bigger gains by Honeywell suggest that the generally pricier Nest may be losing some ground [as] others bring products to market in the smart thermostat segment."
This suggests that Google's Nest has already built an important name for itself, but that being early (and really cool looking) may not be enough to maintain the lead in the mass market. And that's the market that will determine the big winner. So right now, it looks like the real question is can Nest fend off old stalwarts if they undercut on price.
If Google can leverage its big data prowess, it might have a chance of justifying premium prices and carve out a nice niche for its product. However, my bet would be on Honeywell being able to change with the times and take a commanding position, even though it looks like it's a bit late to the party. Its devices aren't as cool looking as a Nest, but the home connectivity features are pretty compelling.
Picking a winner
Although some of these smart home ideas are just starting to catch on, the convenience factor alone is enough to create huge customer demand even without discounts from insurance providers. And if these gadgets turn out to be as popular as they are cool, new home construction will eventually start to include them as a regular amenity. That's why now, when the playing field is fresh, is the time to stake out your turf or, in the case of Google, get into a new line of business.
As a consumer you'll want to see if making your home a smart home has benefits beyond the wow factor (give your insurance company a call). As an investor, you'll need to decide if you want to buy the early leader with the hot, but expensive, product in Google's Nest or a company known for thermostats that appears to be picking up steam in the smart home market (Honeywell).
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Google (C shares). The Motley Fool owns shares of 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.
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