Analysis: U.S. industrials, telecoms to face off in home automation

NEW YORK Thu Aug 23, 2012 2:01pm EDT

NEW YORK (Reuters) - Ingersoll Rand Plc (IR.N) Chief Technology Officer Paul Camuti works for one of the world's largest maker of home locks and yet he has no idea where his house keys are. That's because Camuti uses his smartphone to unlock his front door.

Ingersoll, which sells Schlage locks and Trane air conditioners, is one of a handful of U.S. manufacturers that are pushing into the so-called home automation, or connected home, market, by providing high-tech services that allow people to remotely control home access, heating and cooling, and energy use.

These manufacturers, including Honeywell International Inc (HON.N), United Technologies Corp (UTX.N) and Tyco International Ltd (TYC.N), which have established a beachhead in home automation, are facing new competition from cable and telecommunications service providers that also see such offerings as a way to retain customers.

Verizon Communications Inc (VZ.N), AT&T Inc (T.N), Comcast Corp CMSCA.O and Time Warner Cable Inc (TWC.N) either have home automation offerings or are about to launch them.

"We're seeing a dramatic transformation from mechanical to electronic security," Camuti said in a recent interview.

Ingersoll estimates the U.S. energy and security home automation market will top $2.5 billion within five years, compared with about $1.5 billion today. But for that growth to occur, prices will have to come down, according to Camuti.

"If the minimum price you have to pay to automate a home is $2,500, the addressable market is pretty small," Camuti said. "If your entry level price is $250, the market is a lot bigger. We're focused on making sure we get that price down."

Only about 3 percent of U.S. homes have automation systems today, but analysts estimate that will increase by double-digit rates over the coming years. The spread of broadband Internet service and smartphones has paved the way for growth.

Obstacles range from a still-sluggish U.S. economy and housing market to concerns about hackers potentially breaching security systems that are controlled by smartphones.

The biggest hurdle, however, analysts and executives said, is consumer awareness. Using an app to turn up the air conditioning before you get home is still a fairly novel idea, and the technology can seem complicated.

But that problem - convincing consumers that services will be easy to use - is one that cable and telecommunications companies have a lot of experience in solving.

"Have you ever had a water leak when you're away from home? You can shut it off at the main remotely," a New Orleans home owner boasts in an AT&T Digital Life advertisement.

The president of Honeywell's security group, Ron Rothman, sees cable and telecom companies as both partners and competitors. Indeed, manufacturers need cable and telephone lines to connect their automation systems, while cable and telecom companies sell services based on gear supplied by the industrial companies.

"I love the fact they're in the business," Rothman said. "The things that have held the industry back, why penetration rates aren't higher yet ... is ease of use."

MONITORING KIDS, PETS, GRANDMA

Although pilot programs exist in smaller markets, the United States is well ahead of others in the adoption of home automation technology, industry experts said.

Tyco's ADT service, soon to be split off into a stand-alone company, is the leader in an increasingly crowded field. Tyco's home automation service is called Pulse and allows homeowners to monitor energy use when they are away from home. With a 25 percent share of a fragmented home security market, ADT has five times the revenue of the next two players combined.

The falling cost of communications components have made it cheaper to embed electronic controls and sensors in a variety of old-line electrical equipment, providing data on everything from energy use to wear-and-tear, such as when an air conditioner needs a new filter.

Manufacturers plan to boost the proportion of revenues that come from subscription-based home automation services, which often offer higher margins than equipment sales. That model - already embraced by makers of heavy equipment such as electric turbines and elevators - can make revenue more predictable and resilient to cyclical economic swings.

There are many home automation options: a system can be programmed to send a text-message to a home owner if the kids are late from school, or the cat has gone outside, or an elderly family member needs help. They can be used to let a gardener on to the property, or open the garage door for a package delivery.

About 30 million North American homes are monitored by home security services, down from about 36 million before the recession, according to BernsteinResearch, which estimates the value of the residential and small business market at around $12 billion in 2011. Many are just plain old burglar alarms - but they represent a base on which to grow.

"In home automation, we're just scratching the surface," security consultant John Brady, president of TRG Associates, said. Fewer than a quarter of U.S. homes currently have security systems, roughly half the penetration rate of cable television.

Eventually, such services will follow an aging U.S. population and expand beyond lighting and thermostat controls to medical services. Health service providers will be able to see when patients take their medicine or need emergency care.

Ingersoll's Nexia home-intelligence service was one of the first to come to market with an offering with enough capability and low enough price, to appeal to a mainstream customer, said Tom Kerber, director of research at Parks Associates, a market research firm specializing in new consumer technologies.

"The hope is you can break out of that (small) percentage of homes with professionally monitored systems and get into the middle with something more sophisticated," he said.

In coming years, providers will decide which business model suits them best: Sell devices and installation, offer menus of subscription-based services, or partner with big retailers, such as Lowe's Cos Inc (LOW.N), which is launching its own "Iris" home automation system in coming months.

Honeywell, whose Total Connect service links thermostats and lighting devices with weather and traffic information, considers home automation a key strategic focus.

It's early days yet, so estimates of market size are all over the place. Rothman's starting point is the 150 million homes worldwide that already have Honeywell technology, much of it easy to upgrade for new functions.

"We're a hardware manufacturer with a software element," Rothman said. "We'd love to sell more of the software ... but we're still heavily weighted on the hardware side."

(Reporting By Nick Zieminski in New York. Additional reporting by Scott Malone in Boston. Editing by Andre Grenon)

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