This story appears in the August 17, 2014 issue of Forbes. Subscribe
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Alex Hawkinson just wanted to give his house a voice. In February 2011 Hawkinson, an executive at technology startup
"It struck me: I couldn't believe the house didn't have a voice," says Hawkinson, 41, a midwestern-raised serial entrepreneur. "I have a handyman who lives half a mile down the road. He could have shut the water off, and we would have had no issue."
He went searching for some way of making sure this never happened again but soon found himself with a lapful of sensors and no simple means of connecting them. They all used different apps and wireless technologies. What began as a side project to give his house a voice turned into an idea for a company that could connect the ever-growing list of connected gadgets on the market: thermostats, locks, alarms, lights and Crock-Pots.
SmartThings, the firm he founded a year after the Colorado trip, is now doing a brisk business selling a $100 hardware hub with a smartphone app and cloud service that connects thousands of gadgets. It also sells more expensive kits crammed with third-party sensors and devices for home security, temperature control and water detection. The firm, based in Washington, D.C., already has 5,000 developers using its software to build applications to run various combinations of gadgets in useful ways. For example, your fitness tracker could tell your coffeemaker when you wake up so you have a fresh pot ready in the morning, or a moisture sensor could tell when a pipe is leaking and alert you via smartphone to turn the water off. SmartThings plans to introduce paid apps, à la
SmartThings cofounder and chief technology officer Jeff Hagins likens the model to cloud-computing powerhouse Salesforce. "It built this platform for developers because they honestly didn't have the expertise for every possible application," he explains. "We looked at the smart home and said exactly the same thing. We don't have all the answers."
The smart-home industry is expected to reach $17.9 billion in hardware and services revenue this year, growing to $40 billion by 2019, according to Strategy Analytics. The race is on to grab some of that pie, with a plethora of startups and tech giants embarking on converging strategies. Apple announced its HomeKit platform at a recent developer conference, promising a single service to synch devices in the iOS environment.
SmartThings is a tiny player in all of this, but its "platform" approach is getting attention. Samsung is reportedly making moves to buy the startup for $200 million, TechCrunch reported in July. Talk of a partnership with Lowe's has been circulating. Since SmartThings began shipping its hubs after a September 2012 campaign on Kickstarter raised $1.2 million, the company claims to be in tens of thousands of U.S. homes and that its installed base is increasing 10% to 20% a month. In November it raised $12.5 million in equity from Greylock Partners, Highland Capital Partners and BoxGroup.
The growth in hardware sales is impressive, but future profits are not going to come from $100 hubs. Even SmartThings' rivals such as Revolv, which sells a $300 hub (but lacks an open platform for app developers), admit this. "Nobody right now is making money at the hub level," says Revolv cofounder Mike Soucie. "There's a lot of betting on the long-term future and willingness to take losses. That's where the market is--placing bets on the future."
The bigger opportunity for SmartThings and the whole Internet of Things industry is in selling services. Insurance companies want to issue more intelligent policies based on live data emanating from your home. Elder-care companies are eager to charge families for the ability to monitor the condition of their loved ones via smartphone monitoring. Companies like SmartThings would receive a portion of each sale made through its system.
SmartThings' first real business deal on this front is its partnership with Cross Country Home Services, the second-largest home warranty provider in the U.S. Expected to roll out nationwide later this year, the partnership will connect SmartThings users with the warranty provider's network of 150,000 contractors to help install a SmartThings system or to fix broken appliances when a smart home sends out an alert. Each time a SmartThings user hires a Cross Country contractor, SmartThings will get a piece of the fee.
"Within three or four years services revenue will exceed hardware, and after that it will eclipse it by quite a dramatic margin," says Hawkinson. "There will be a saturation point at some time where everything is connected up--where you won't be able to buy a door lock that isn't connected. After that it'll be all the services created on top of these things."
Hawkinson is particularly bullish on the potential for sensor data to shake up the insurance industry. As homes get more connected, the massive amounts of data they produce will reveal the flaws in actuarial tables. Generically priced (and sky-high) premiums will no longer make sense. Allstate already offers a 25% premium discount for those who sign up for a home monitoring service. "I don't know if the insurance industry will change their model fast enough," Hawkinson says. "Smart homes absolutely eviscerate the current system. Insurance is a tax on society. It should be less."
Insurance companies are taking an active role rather than waiting for change to hit them. SmartThings currently has projects under way at four of the ten largest insurance companies. American Family Insurance recently joined with Microsoft to create a smart-home incubator in Seattle that SmartThings will mentor.
The number of services that could be spun out of this is limitless, says Hawkinson. "You can pick industry after industry. The ramifications of making the entire world self-aware are simply massive. "
