It’s Just a Matter of Time Before What Makes a Smartphone Smart Makes Everything Else Smart Too…
I was surprised when Google announced on January 13, 2014 that they would purchase Nest Labs, Inc. of Palo Alto California for $3.2 billion USD in cash, not simply for the fact that Google seems to have a significant amount of intestinal fortitude when it comes to shelling out big dollars for small businesses ($3.2 billion USD, for example, is larger than many of the component markets I study on a worldwide basis). So to spend that kind of cash for a company that began selling minimalist thermostats and smoke detectors over the Internet in 2010 seemed incongruous until I began to review the Nest patent filings at the USPTO. It would seem that Google is not just buying a start-up that is re-inventing household items, but is buying a frontrunner in the emerging global market of "The Internet of Things."
"The Internet of Things" or the IoT is a term that describes a system where the Internet is connected to the physical world via ubiquitous sensors and communication components. It is estimated by Cisco Systems, the world's largest manufacturer of data communications networking equipment, that by 2020 as many as 50 billion devices of all types, shapes and sizes will be wirelessly connected to the Internet, and Nest Labs, Inc. is at the forefront of the "Things" portion of this technological tidal wave. Cisco estimates that by the end of 2014 that 14.4 billion "Things" will be connected to the Internet, up from 11.2 billion in 2013. In Cisco's forecasting, the volume of connected devices will increase from between four and eight billion "Things" per year until 2020.
What's more is that electronic component requirements for the fruition of the 2020 vision of the IoT will require the mass proliferation of sensor and communication technology including Bluetooth® antenna, radio frequency identification tagging, near field communication technology, barcoding, quick response coding and digital watermarking.
The company also predicts that almost all new electronic "Things" will have Internet connections by 2020 due to declining component costs, which will be enabled by massive economies of scale. Therefore, additional support components, including capacitors, resistors, inductors, sensors and circuit protection devices will be positively impacted by this emerging trend. The "Internet of Things" whereby any household device is ripe for redesign and connection; is a trend that is upon us and made possible by the creation and proliferation of the Internet and the availability of low cost electronic components.
According to the Google press release announcing the purchase of Nest Labs, Nest's mission is to "reinvent unloved but important devices" such as thermostats and smoke alarms. Nest was co-founded by Anthony Michael Fadell, one of the original designers of Apple's iPod®, so the fact that both the thermostat and the smoke detectors produced by Nest are emotionally engaging and feature rich should come as no surprise, and precisely the balance between smart feature and intelligent design required to turn a regional pioneering fad into a solid global market.
The Nest smoke detector for example, called Nest "Protect," takes the age old smoke detector design (a legacy design that Nest describes as "scary," "irritating," "annoying" and downright "dangerous,") and makes it smart, giving it a human voice, telling the resident what the problem is, where the problem is and what to do next. What's more is that the device can be monitored by your wireless handset through an application downloaded from the Nest website (i.e. it is connected to the remote control of our lives - the smartphone), so that if smoke or carbon monoxide is detected, the device will signal your phone and tell you which device has registered and what to do next.
Nest's first successful product was the "learning" thermostat, which is also the re-imagining of an age-old product. The Nest thermostat is designed to adapt to the customers changing lifestyle, a learning device that programs itself, adapts to its owner's behavioral pattern, and most importantly, can be controlled through a smartphone as well. The company claims that the owner of a Nest thermostat can save between 10% and 20% off its electric bill each year. The Nest thermostat offers automatic scheduling features (it learns your patterns and adjusts the temperature accordingly; a green leaf visual icon (which lets you know when your making energy conscious decisions); and an auto away system (which senses when the resident is not home); a energy history function (which shows the resident their patterns) and both phone and computer control via the Internet.
What is important about the Nest smoke detector and thermostat is that it establishes a blueprint for how to go to market with devices that are meant to comply with "The Internet of Things." They must be emotionally engaging in their design and smarter than the products they replace, but most importantly, they must be able to be connected to the Internet via a smartphone where their functionality can be both monitored and manipulated.
What is more important from a market perspective, is that unloved and dumb devices are ubiquitous and represent a tremendous global market opportunity based on the potential for the churning and replacement of legacy products with new designs. Welcome to the next big thing in electronic components. The total available market, (TAM) for example, for thermostats worldwide (installed base) is an estimated 1.885 billion units with a market value of $110 billion USD; and the global total available market for smoke/carbon monoxide detectors (installed base) is an estimated 2.745 billion units with a global market value of $82 billion USD, for a combined TAM of about $192 billion USD worldwide just for thermostats and smoke/carbon monoxide detectors alone, not to mention all the other unloved and dumb devices cluttering up the modern household (when we consider all the brown and white goods in the average home, the TAM stretches well into the trillions of dollars globally, this is a very big deal).
In the vastness of technology innovation, identifying trends early can mean all the difference in generating revenue and profitability later on. The "Internet of Things" is no different. As a component market researcher, it is part of my job description to find the pioneers and early settlers who have identified how the IoT will impact the future landscape of both end-products and the electronic components that support them. The exercise to determine which companies to watch includes tapping into primary sources in home automation, including smart home installation companies; and appliance distributors, to determine which companies are ahead of the curve, and have similar visions of the future as Nest Labs, Inc. One such company that we have identified is Withings, Inc., which manufactures a variety of smart devices for the home, including smart baby monitors, smart bathroom scales, smart blood pressure monitors, and smart activity trackers; Kwikset Kevo, which manufactures smart door locks; as does Goji; Belkin, which manufactures smart small home appliances and light bulbs; Sonos, which manufactures smart hi-fi stereo systems; and of course the massive Samsung Electronics and LG Electronics, each manufacturing smart large home appliances, all of which can be connected to the internet and monitored and manipulated from a smart phone.
In addition to the pioneers and early settlers noted in the previous paragraph, we also note that Nest Labs, Inc. has its eyes on the future and the development of advanced communities based on the "Internet of Things."
Nest was granted this patent in December 2013 - "Dynamic distributed-sensor thermostat network for forecasting external events (US8620841 B1)", which suggests to us they are three chess moves ahead of the potential competition, and which includes the following example of the benefit of the "Internet of Things," "As a specific example, a building can include one or more smart devices, such as a thermostat, hazard-detection unit (e.g., smoke detector and/or carbon-monoxide detector), light switch, wall-plug interface, security system, or appliance. A network of devices can include smart devices across multiple rooms, across multiple buildings, across cities, etc. Within a given network, the devices can include different device types or same or similar device types. Each device within the network can include one or more sensors (e.g., to detect motion of the sensor, motion of an external object, temperature, humidity, or pressure). Data indicative of the sensor measurements can be conditionally transmitted (e.g., on detection of an abnormal event) or regularly transmitted by a respective device to a central server. The central server can correlate the data across a set of devices in order to estimate whether readings are due to a sensor malfunction, a stationary event, or a moving event. For example, accelerometer readings from a set of devices within a locality (e.g., within a zip code) can be used to estimate whether an earthquake is occurring, temperature readings from a set of devices within a locality (e.g., within a city) can be used to estimate weather patterns, and motion-detection readings from a set of devices within a locality (within a set of rooms) can be used to estimate a trajectory of a person within a building. The central server can then predict characteristics of a future event (e.g., its location and/or strength), and can send alerts to other devices within a region predicted to be affected. The other devices can then alert users of the event or can automatically implement device settings to prepare for the event."
So Nest is not only envisioning a community of connected component packed devices, but actually has the tools and know how to make it happen. The impact on the electronic component industry will be significant. The patent goes on to describe the individual types of sensors that could be packaged into a thermostat for example, thermal sensors (i.e. NTC thermistors) seismic activity sensors (i.e. accelerometers), hazard related environmental sensors (air quality sensors), microphones, optical sensors, and radiation sensors, for example.
So the opportunity for electronic components designed to support the "Internet of Things" could have a major impact on supply and demand equations for electronic components over the next ten years as companies rush to design smart connected household items to replace items that soon will become the dinosaurs of their age.
Already we've seen additional items coming down the pipeline, including door and window locks that can be monitored from handsets and open and closed remotely; or light switches and electrical outlets that can also be remotely accessed and controlled. Each of these new designs will require new end-product designs creating churn in existing component markets such as capacitors, resistors and inductors and create a significant market opportunity for sensors of all types, especially those individual components that are designed to operate in line voltage applications.
According to Cisco Systems, the company is predicting that new products will emerge in the next decade that will amaze and astound and create an unprecedented market opportunity for systems and support components based on customer relevance and value. Cisco foresees that a massive quantity of items will be Internet connected and controlled; a proliferation of communications and control of devices that can learn and become more efficient in response to consumer behaviors or needs. Cisco foresees a re-invention of additional household items beyond what Nest Labs has already created; including other unloved but omnipresent items beyond the smoke detectors and thermostats already being targeted, and will include, but not limited to door and window locks, door bells, home security systems, clock radios and personal alarms, light switches, electrical outlets, HVAC systems, small household appliances, large household appliances, automobiles, and many other devices only limited by imagination. The global market opportunity for devices and support components is global and enormous, with a churn rate that will drive demand for multiple product markets and create unprecedented opportunities.
Many support product lines will be positively impacted by the "Internet of Things." Various types of sensors, including accelerometers, temperature sensors (NTC and PTC thermistors for example), humidity sensors, optical sensors, chemical sensors, etc., will be positively impacted by the IoT . However, other passive component products, especially safety capacitors (both film and ceramic X and Y capacitors), vertical chip aluminum electrolytic capacitors (which can be plainly seen in the Nest patent applications), wirewound resistors, nichrome resistors and discrete inductors will also benefit from the coming "Internet of Things."
Dennis M. Zogbi is the author of more than 260 market research reports on the worldwide electronic components industry. Specializing in capacitors, resistors, inductors and circuit protection component markets, technologies and opportunities; electronic materials including tantalum, ceramics, aluminum, plastics; palladium, ruthenium, nickel, copper, barium, titanium, activated carbon, and conductive polymers. Zogbi produces off-the-shelf market research reports through his wholly owned company, Paumanok Publications, Inc, as well as single client consulting, on-site presentations, due diligence for mergers and acquisitions, and he is the majority owner of Passive Component Industry Magazine LLC. View other posts from Dennis M. Zogbi.