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Business model battles in the smart home appliance market

“Smart home” has been a catch phrase for selling home automation gadgets and appliances to consumers since the early 2000s. So much so, that nearly every large tech company sees a billion dollar opportunity in this field.

But who is going to build a winning business model in this space? For now, it is not yet clear as the market is still in its infancy. In 2016, the global revenues linked to smart home appliances, driven mainly by hardware sales, amounted to US$16.8 billion only. In comparison, the global smartphone market is 25 times bigger and accounted for US$422 billion in 2016.

Currently, the US leads in smart home development with US$10.4bn in revenue, which is by far the largest single-country market. In comparison, Europe accounts for about US$3.3bn market share.

Winning business models

So where is the money to be made in this game? In general, there are three business models in the smart home market:

The first option is to establish new connected hardware. This is where European startups and scale-ups see the largest opportunity at the moment. Tado or Withings are examples of promising businesses in this area.

The second opportunity deals with controlling the huge amount of data generated by consumer Internet-of-Things (IoT) devices, which are due to become the ‘eyes and ears’ of every household. Currently, big tech companies such as Amazon, Apple, and Google are trying to establish the most convenient layer of interaction with IoT devices. These could be voice or gesture-controlled, or else recorded by various sensors as part of a virtual assistant system such as Amazon Alexa or Google Home.

In this domain, startups and small businesses are at a disadvantage when competing with the massive financial, intellectual, and technological resources of incumbent tech giants.

The third option is of interest to startups and is currently under the radar, namely building an ecosystem of services based on the data collected from smart home devices. Similarly to the many consulting or analytics services that were established around Google’s Android operating system, smart home data will provide startups with the opportunity to deliver complementary, and currently unforeseen, services.

European smart home startups landscape

The European startup landscape for smart home applications encompasses five major categories: general home automation, energy management, smart entertainment systems, security, and assisted living for disadvantaged people.

Individually, none of them has created enough added value or social engagement to drive adoption rates. But this is gradually changing as more stand-alone applications are combined through a single point of control.

Analysis carried out by Statista shows that there is still a long way to go. Nevertheless, there are many promising signs that market development will gain increasing traction in Europe. For instance, startups like tado, Sonnen, AlertMe, Withings or Netatmo (almost all founded in the late 2000s or early 2010s) raised a combined total of over US$260 million in venture capital, about US$100 million of which was raised by tado and Sonnen in 2016 alone.

Interestingly, while smart home revenues are still lagging in Europe, many cities such as Bristol, Barcelona, and Vienna are leading the way through ‘smart city’ initiatives, which provide a testing ground for startups to experiment with IoT devices. This gives local businesses a competitive advantage to trial the best way to combine individual services through a shared infrastructure. Not surprisingly, those cities also placed highly in the newly released European Digital City index.


What’s next?

Returning to the original question: who is going to build the winning smart home business model and what will it look like? In terms of data control, user interface, and operating system, it will most likely be one of the GAFA players (Google, Amazon, Facebook, Apple) who will lead the way.

In terms of hardware solutions for dedicated use cases, there is a big opportunity for European businesses. Statista expects that the hardware-driven market volume will grow almost six-fold between 2016 and 2021, reaching a total market size of US$19.4 billion. Although, a market of this size may not result in a second Apple-like hardware giant, it still offers attractive business potential for many fast-growing companies.

The largely untapped area of B2B-revenues and service offerings is expected to develop quickly within the next few years and will most likely add a considerable amount of revenue to the smart home world. However, getting connected devices in private households also comes with its own set of problems.

To help the European market take off, regulators and industry associations must urgently define general standards on privacy and data security to strengthen trust in this burgeoning technology. This includes taking into consideration the implications of inserting ‘eyes and ears’ in people’s homes and addressing the lack of consideration for data security. In short, despite a rosy future on the horizon, smart homes technology still requires significant technical, social and regulatory questions to be answered prior to full adoption.

Author

Yann Finger

Yann is a Research Assistant in the policy and research team. His focus is on investigating policies supporting digital entrepreneurship across Europe, as part of the Startup Europe ...

Tobias Bohnhoff

Tobias Bohnhoff leads the Digital Market Outlook division at statista.com. As part of a team of analysts and market researchers, he helps companies to understand the latest market dy...