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Connected Homes December 2014/January 2015 Viewpoints

Technology Analyst: Kyle M. Whitman

2014: The Year in Review

Several large-scale acquisitions took place in the home-automation market. Major content providers and rights holders took steps toward offering more ways for people to access media. And virtual reality failed to become a major consumer product. Sections below discuss these and other significant connected-home developments that occurred during 2014.

Home Automation

The year 2014 was not a breakout year for home automation, but many significant business developments and new product introductions did take place during the year.

  • Google's acquisition of Nest Labs. In February 2014, Google acquired Nest Labs, maker of the Nest smart thermostat and Nest Protect connected smoke and carbon monoxide alarm, for $3.2 billion. In a regulatory filing, Google stated that it would "allow Nest to continue to innovate upon devices in the home," suggesting that Nest Labs would operate independently after the acquisition, rather than becoming part of a larger Google home-automation ecosystem. (Google had been trying—and failing—to launch such an ecosystem for the past several years.) Nest also released a postacquisition statement in which it promised to continue to support Apple products. Thus far, Nest does appear to have been operating with little interference from Google. Many analysts have asserted that Nest may be sharing data about its users' activities with Google following the acquisition and that Google may be exploring ways of capitalizing on these data. Nest's products are in the position to collect some potentially valuable data that Google may not have access to already—particularly if a Nest user does not own an Android device. Nest's smoke detectors and thermostat have sophisticated presence-detection features that they use to trigger behaviors and responses depending on whether people are present in a home (or even in a specific room in a home). Nest gadgets could supply interesting information about the intimate details of a household's lifestyles, which could in theory be useful in Google's foremost revenue-generating activity—namely, advertising. Nevertheless, Nest's postacquisition statement asserts that it continues to limit its use of customer data to "providing and improving Nest's products and services," and Nest has also asserted that its privacy policy provides that users' "data won't be shared with anyone (including Google) without a customer's permission."
  • Nest Labs' acquisitions of Dropcam and Revolv. Following Google's acquisition, Nest made some key acquisitions of its own during 2014. In June 2014, Nest acquired security company Dropcam for $555 million. Dropcam sells self-contained security cameras that connect to a user's Wi-Fi network and stream high-quality video and audio to Dropcam's cloud service over a secure broadband connection. Dropcam's cloud service allows authorized users to view camera footage and listen to audio from anywhere a broadband connection exists and also analyzes video data and generates automated alerts that users can customize. For example, a user can have Dropcam send a text message to a mobile number if the camera detects motion during a particular time of day. As with Nest's products, Dropcam's products and accompanying service are not unique, but Dropcam enjoys a reputation for exceptionally high quality and ease of use. Nest intends to integrate Dropcam into a growing suite of home-automation services. Later in 2014, Nest acquired Revolv, a company that offered a home-automation controller that connected various home-automation peripherals and allowed users to control them remotely using their home broadband connection. After the acquisition, the company stopped selling the devices; Revolv's hubs offered much better usability than those of its competitors but were selling poorly in part because of a high price point. Nest appears likely to relaunch a voice-enabled hub or integrate such functionality into other Nest products.
  • IFTTT. IFTTT—for "If This Then That"—offers a cloud-based platform that allows individuals to connect different online services in such a way that an event that occurs on one service can trigger another event to occur on some other service. For example, an IFTTT user can use the platform to create a "recipe" (IFTTT's term for user-created cross-service scripts) that causes a text-messaging service to send an alert to his or her phone whenever a new episode of a particular video series becomes available on a streaming-video service. IFTTT users can also create recipes that interact with different applications running on their phones, tablets, or other devices and that interact with a variety of network-connected devices, including home-automation peripherals. Many other services and applications allow users to do what IFTTT makes possible, but IFTTT generally tends to be much easier to use than competing devices. The service also allows users to share recipes with one another; that option, coupled with the service's relatively large user base, helps increase the overall value of the service for end users. Although IFTTT has been in operation since 2010 and has connected with home-automation peripherals since at least 2011 (see the December 2011/January 2012 Viewpoints for a discussion of Twine, an early Wi-Fi-enabled home-automation peripheral that featured IFTTT integration), IFTTT had a relatively small impact on home-automation markets until 2014. Following a $30 million venture-capital infusion in August 2014, IFTTT announced partnerships with dozens of home-automation-peripheral makers and several large home-automation- and home-security-service providers. Among other companies, Comcast, ADT, Philips, Belkin, Nest, Honeywell, Quirky, Archos, and Logitech announced IFTTT support during the latter half of 2014. IFTTT thus enters 2015 as a major player in home automation, although the ultimate impact that its service may have on the overall home-automation market is uncertain.
  • August Smart Lock. Many companies now offer connected electronic door locks that can replace existing deadbolt locks that are common on homes' exterior doors. Most such locks are capable of operating in manual mode (using a conventional key and thumb turn for locking and unlocking), as well as remote operation via an authorized user's smartphone, tablet, or PC. Through a cloud service, users can lock or unlock their doors and view the status of their locks. During 2014, start-up August began offering a smart lock that works using short-range Bluetooth wireless communications with users' smartphones directly and that does not rely on a home broadband or local-area network connection for smart-lock functions. The company's smart lock attempts to mimic the user experience of passive keyless entry, a feature that is common in the automotive industry. Instead of requiring a user to issue a command to lock or unlock a door deliberately, the lock can detect when an authorized user is approaching and automatically unlock the door by detecting the presence and identity of the user's paired Bluetooth device. When the user leaves the area, the door locks itself again. Another feature causes the lock to engage automatically 30 seconds after it has unlocked, irrespective of a user's presence. Currently, the August Smart Lock's passive keyless-entry features trigger whenever a user's device is within Bluetooth range (up to 100 yards, according to August). Comparatively, keyless-entry systems on vehicles typically trigger only when a user's key fob is within a few feet of the vehicle. A system that triggers the lock within such close proximity offers a far better and more secure user experience than August's current system does. Users may be too far away to hear an August lock engage or disengage when it occurs, requiring users to interact with their devices to view the lock status, which eliminates the main benefit of passive keyless entry. Moreover, users' homes can be vulnerable to unauthorized entry during the time between when the user closes the door and when he or she leaves Bluetooth range; users who reside in apartment buildings may be well out of line of sight of their doors by the time an August lock automatically engages. August is reportedly exploring means of shortening the triggering distance, and the company has released a bridge device that connects the lock to a home broadband connection via Wi-Fi, allowing the lock to function in a manner similar to that of most other smart locks. Still, the idea of passive keyless entry for homes is compelling, and such functionality has previously been the exclusive domain of enthusiasts. August or other companies may refine the concept in the near future.
  • Apple HomeKit. In 2014, Apple released a new version of its iOS mobile-device operating system that incorporates a proprietary standard—HomeKit—that allows iOS devices to act as controllers for home-automation peripherals from a variety of third-party manufacturers. Apple's initial HomeKit partners include Honeywell and Philips, which has a history of launching home-automation products using Apple's retail network. HomeKit differs very little from other proprietary home-automation standards that smartphone makers and platform providers have unveiled many times in the past, and as of the end of 2014, nothing indicates that HomeKit has had any significant impact on the home-automation market or has attracted an unusually large amount of support. Still, HomeKit may yet have a significant impact by virtue of Apple's exceptionally dedicated user base, a large portion of which is likely to be home-automation early adopters.

Connected Home Entertainment

Perhaps the most significant development in connected entertainment that occurred during 2014 was the introduction of online access to high-value video content from HBO, Disney, and others. The new service from the companies heralds what is likely to be a trend going forward, with major film and TV studios improving access to their properties to people who do not subscribe to cable, satellite, or telephone-company pay-TV service.

Notably, during 2014, Disney began offering a new online digital-rights-management (DRM) and video-streaming service, Disney Movies Anywhere. In essence, Disney Movies Anywhere allows users to transfer licenses to Disney titles that they may own on one participating service to all other participating services. For example, a person who owns a license to a Disney movie on iTunes could download and watch that movie on Google Play and Vudu also. Disney Movies Anywhere also allows individuals who purchased physical copies of movies that included digital copies to access those digital copies through the service's streaming player, as well as through Google Play, iTunes, and Vudu. As with all DRM services, Disney Movies Anywhere's terms and conditions are complex, but the service appears to offer above-average usability and provides significant value to end users, who gain the ability to stream movies on demand without having to subscribe to a separate service, as well as to swap between different mobile-device ecosystems without needing to repurchase media libraries.

Also, during 2014, HBO announced that it would begin offering users in the United States direct access to its online video-streaming service—HBO Go—beginning in 2015. HBO Go promises to allow users to stream a selection of movies and television shows that are part of HBO's premium pay-TV content library over a broadband connection. Previously, the service has been available only as a complement to a pay-TV subscription; to access the service, users needed to verify that their household subscribed to a pay-TV service and to a premium-channel package that included HBO. HBO had previously resisted offering a stand-alone version of the HBO Go service because of potential negative impact on the revenues the company earns from fees it charges to pay-TV providers to carry HBO programming, but evidently the company now believes that to potentially sacrifice some carriage-fee revenue in favor of potential revenue from streaming-only households would be more lucrative overall. The decision reflects a general practice among content producers, but it is not necessarily a signal that "cord cutting"—a practice in which households replace pay-TV services with a mix of online streaming-video services—is on the cusp of becoming a mainstream activity. (Of course, so-called cord cutters typically must rely on wireline infrastructure to access online services in general, including HBO Go, Netflix, and other premium video services.)

Cyberattacks against Sony and Microsoft inconvenienced users and made headlines during 2014. Beginning on Christmas Day, a group of malicious hackers engaged in a large-scale distributed denial-of-service (DDoS) attack against Sony's PlayStation Network (PSN) and Microsoft's Xbox Live service. A DDoS attack uses a vast number of devices to overwhelm an online service with spurious connection requests, thereby making legitimate users unable to access the service. The attack succeeded in making both PSN and Xbox Live unavailable for nearly all users for most of 25 and 26 December 2014, and PSN continued to suffer service outages for several more days. Hackers timed the service disruption to occur when large numbers of people would be attempting to connect new PlayStation 4 and Xbox One consoles they received as holiday gifts to online services in order to perform software updates that are necessary before users can play games; even games with no online component might require a software update. The disruption is notable because of its scale and persistence in the face of sophisticated countermeasures. The attackers were able to take down both services despite Microsoft's and Sony's implementation of robust anti-DDoS measures, including partnerships with cloud services that specialize in defending against DDoS attacks. Connected-home services of all varieties could face sudden and severe disruption from similar kinds of attacks in the future.

Generally, game-download services as well as terrestrial pay-TV services continued to roll out new hardware that shifts a larger proportion of their video services away from conventional delivery methods to IP-based delivery, but the overall transition was relatively limited and incremental during 2014. Similarly, the newest generation of game consoles emphasizes (but does not require) digital game delivery, but growth of connected gaming was nonetheless largely incremental.

What Did Not Happen in 2014

  • Steam machines. Valve Software owns and operates the digital-game-service Steam; during September, the company announced that Steam serves more than 100 million active accounts. During the second half of 2013, Valve launched a series of initiatives that it hoped would help transform PC gaming into a more "couch-friendly" activity, essentially allowing PCs to compete against dedicated game consoles more directly than they have in the past. Despite a great many similar efforts going back decades, PC-gaming interfaces have remained very difficult to use while sitting in an easy chair or on a sofa. Generally, PC user interfaces, including in-game interfaces, have not been very suitable for use when a person is sitting a long distance from a monitor or television (conversely, consoles and console games come equipped with "ten-foot user interfaces" that are well suited to living-room environments). By the end of 2014, Valve's efforts to market a "Steam box" for big-screen PC gaming had no significant effect on game-console markets. An important component of Valve's initiative was the introduction of a new type of game controller that would give PC gamers the kind of precise control that keyboard-and-mouse schemes offer currently while offering the form factor of a conventional handheld-game controller. In May 2014, Valve announced that it was delaying the release of this controller until 2015.
  • Virtual reality. Oculus VR had intended to release its first mass-market virtual-reality (VR) headset by the 2014 holiday season, but the company did not meet that target. Instead, it continued to sell new iterations of its VR headset to early adopters on a limited basis while working on further refinements to its final consumer product. The company now hopes to release its first mass-market VR headset by the end of 2015. VR did come to the mass market in a limited sense in 2014, however. In late 2014, Samsung released Gear VR, an attachment for the company's Galaxy Note 4 smartphone that transforms the phone into a VR headset. Samsung codeveloped Gear VR with Oculus, and the device thus incorporates many key technologies from Oculus that allow it to function well as a VR headset device, roughly on par with the initial developer version of the Oculus Rift headset. At launch, very limited content was available for Gear VR.

Look for These Developments in 2015

  • Expect demand growth for telehealth services to accelerate, particularly in the United States, where several regulatory changes relevant to telehealth take effect during 2015. Among the more significant changes is a new regulation that will make it much more expensive to hire workers who provide home care to elderly and frail persons. The regulation narrows a long-standing exemption to US federal overtime and minimum-wage laws for individuals "whose primary responsibility [is] to watch over an elderly person or person with illness, injury, or disability in the same manner that a babysitter watches over children." The regulation favors relatively costly "trained personnel, such as registered nurses, licensed practical nurses, or certified nursing assistants." In effect, this regulatory change will make it much more expensive to hire home health aides in many US markets, and health-care organizations will likely respond via deploying more telehealth services (including services that guide unskilled home caregivers in providing health-related tasks). Other important regulatory changes include new provisions that allow reimbursement for telehealth equipment in the US Medicare Physician Fee Schedule. Because virtually all US Medicare recipients are over the age of 65 or are permanently disabled (and because most US residents over the age of 65 are enrolled in Medicare), the new reimbursement rules will ultimately target precisely the kinds of individuals that can benefit most from home telehealth technologies. The US Department of Veteran's Affairs (VA), which oversees health care for veterans of the US armed forces, is also making a large investment in telehealth. Although the VA's investment targets mobile clinics (as opposed to home telehealth equipment), the investment nevertheless increases overall demand for connected health-care-related services.
  • Expect major developments related to network neutrality to take place throughout 2015 in the United States, following a significant decision that the US communications regulator will announce early in the year. Ensuing legal battles will likely delay any immediate impacts from any changes. But stakeholders are monitoring whether the impending decision will resolve this long-standing controversial issue and reduce uncertainty in the future.
  • Look for content producers and rights holders to expand streaming-only offerings greatly in order to capture revenue growth from individuals who choose not to subscribe to cable, satellite, and telephone-company multichannel pay-TV services. Similarly, look for those pay-TV providers to step up integration between third-party streaming services and their own set-top-boxes and delivery platforms.
  • Do not be surprised if home automation once again fails to break into the mainstream during 2015, despite an unusually high level of commitment from various manufacturers, coupled with a large-scale movement away from proprietary ecosystems and toward easy interoperability. Home-automation products that are on the horizon still remain too difficult to use, and the benefits too attenuated, to be worth the effort for the average household to implement. Individual purpose-specific devices, such as Philips' Hue smartphone-controllable color-changing light bulbs and Dropcam's cloud-connected cameras, will likely continue to be successful in 2015 but typically will not form part of cohesive ecosystems within homes.