While Nest wasn’t the first company to offer a smart thermostat, its first product quickly developed rock star status. Nest helped turn the thermostat — a relatively forgettable device — into a sexy offering that made consumers excited about other devices that would be offered as part of the smart home. Honeywell, a company that has long dominated the traditional thermostat market, is now going head to head with Nest in selling smart thermostats. In the third episode of a 7-part series on the future of the smart home, Andrew examines how an industry titan is able to maintain its lead in the smart thermostat space and what this means for manufacturers of smart home devices in other verticals.

Scott Harkins
VP IoT Partner Programs Honeywell Connected Home & Buildings at Honeywell

Blake Kozak
Principal Analyst at IHS Markit

Neil Strother
Principal Research Analyst at Navigant

Paige Leuschner
Research Analyst at Navigant

The Birth Of Smart Home Cool

In the mid-2000’s, Matt Rogers started as an intern on the engineering team at Apple that worked on the iPod. At the time, Tony Fadell was running the iPod group that Rogers reported into. Rogers went on to work on the iPhone and the iPad, and then, in 2010, in what must have seemed like a crazy move at the time, both Rogers and Fadell left Apple and decided to collaborate on, of all things, a thermostat. They began designing the prototype out of a garage that Rogers rented in Silicon Valley.

When Rogers presented the idea of building a smart home to Fadell, even Fadell, who was building his own smart home at the time, told Rogers he thought that smart homes were only for geeks. Eventually, Fadell told Rogers that instead of a whole smart home, he’d like him to focus on a smart thermostat, and they came up with a plan to deliver on one with an interface as friendly as an iPod. This required a team of 100 people, and Fadell and Rogers released the first generation of the Nest device in 2011.

Two things seemed revolutionary about the Nest Learning Thermostat. First, I’m guessing that, before Nest, the overwhelming majority of people couldn’t tell you the name of the company that manufactured their thermostats. For people who purchased Nests, the user interface was so enticing that people began to brag about their thermostat.

If you’ve ever used a Nest, you’d know that there are no switches or mechanical buttons. There’s just a dial. As you turn the dial, you see different options (which are really menus and sometimes menus within menus). When you press on the dial, it selects the menu you want and then you’re presented with more choices you can see by turning the dial. Again, you press to choose air conditioning or press to choose the temperature you want. Strange as it may sound, using Nest is fun. Then, there was the second innovation. You could control your Nest from an app on your iPhone or Android device.

I have two Nest thermostats in my home. There are many times when I’m lying in bed and too lazy to get up and change the temperature. So I take out my phone or iPad and change the temperature from where I am. Yes, it’s an exercise in extraordinary laziness. In subsequent Nest models, they incorporated a motion sensor to detect when you were in a room and then adjusted the HVAC to the temperature you liked. If the device didn’t recognize any motion, then the HVAC was turned off to actually save you money on your energy bill. The experience was so revolutionary at the time Nest was released in 2011 that sales went through the roof. Only a month after its release, it was “sold out” in Nest’s online store. Three years later, Google bought the company for $3.2 billion.

The Smart Thermostat Market

It turns out that thermostats are big business and serve as a gateway to much more functionality within the home. If a thermostat possesses a motion sensor, it might inform other decisions about how the room operates. Motion at a certain time of day might trigger a decision about what lights to turn on or whether the blinds should be open or shut. This type of thermostat could also impact your wallet. Instead of running heat or cool air all the time, now a thermostat could be smart enough to only heat or cool a room when you entered or left.

The thermostat space seemingly has all the attributes of a big vertical ripe for massive disruption by startups. It’s a huge market where, for decades, it’s felt like the basic functionality of a thermostat hasn’t changed. So with the introduction of Nest and Ecobee, you might think this would spell doom for the incumbents. By 2016, smart thermostats were also gaining dramatic market share of the total market for all thermostats. According to Blake Kozak, Principal Analyst at the market research firm IHS Markit, in 2016, 29 million thermostats were sold worldwide. 7 million of those were smart thermostats. And still, the company with the largest market share for thermostats before the introduction of Nest and Ecobee remains today the company with the largest share of all thermostats, including smart thermostats. That company is Honeywell.

Scott Harkins & Honeywell

After Apple launched the iPhone, they quickly eviscerated Nokia’s market share for high-end cell phones and forced them into a virtual fire sale to Microsoft. Amazon, a startup from the Dot-com era, has left a graveyard of retail companies in its wake. But in the home device market, from thermostats to lights, the biggest of players seems to be evading the odds. Not only are they competing with startups, but they appear to be thriving in this new world of devices for the smart home.

Honeywell is a global conglomerate with business interests in aerospace, building materials, engineering services, and home and building technologies. At the time of this article, their market capitalization is over $100 billion. In 2016, their revenue exceeded $39 billion. While their thermostat sales are huge in absolute terms, they represent just a tiny percentage of what this multinational sells that employs over 130,000 people. If you were trying to identify the stereotypical 300-pound gorilla that was ripe for a knockdown by startups in this space, Honeywell would seem to be it.

I spoke with Scott Harkins, VP of the IoT Partner Programs within Honeywell’s Connected Home and Buildings group. My first interest was in understanding how Honeywell defined their role in the home. Honeywell’s focus on the smart thermostat isn’t simply a vestige of their long history in the thermostatic space. Scott believes there are a few devices that are critical to controlling the most important aspects of the future smart home.

Scott Harkins: “[I]f you think about where Honeywell has played . . . in the piece of mind space, is thermostats, HVAC, security, indoor air quality, one of the leading air filter companies in the world, and awareness with cameras. If you think about those three things — cameras, thermostats, peace of mind and security . . . these are the three leading categories in the connected home space. . . . Where we really try to focus on the things that are important at the consumer level. . . . A connected solution that understands the consumer’s habits in the home so that when they get home from work or from wherever, the house is already comfortable and personalized to the way they like it, that protects the home whether they’re there or not, that gives them awareness of what‘s going on in their homes so it can notify them at home or on the road via the app that provides services like alarm monitoring, dispatching of police or EMS services.

“For indoor air quality, one of the cooler things a smart thermostat can do is it will know when your air filter — a very non-connected kind of product, just a filter — when that becomes dirty, it becomes an energy problem for the home. . . [W]e can automatically notify the consumer, we can automatically notify Amazon to ship out a filter so it shows up on the doorstep the next day. We layer those services on top. The product in and of itself has to be a great thermostat, has to be able to control temperature. The security system has to detect a fire or a burglary. The cameras have to see when things are moving and make the proper notifications. But ultimately, we think that them acting or successfully performing what the consumer hired them to do is a minimum to compete. It’s the services that you layer on top of that that I think really bring value. Saving consumers money by enrolling them in local demand response programs is an example.”

One of the biggest challenges with all of these smart home devices is when and how they should be installed. Buildings aren’t like phones where people essentially throw them out after a few years of use. Most buildings are used for decades, and it’s actually a small percentage of the total number of people moving into new residences that is represented by new construction. It’s easy to imagine how smart thermostats or speakers or locks or air purifiers get installed when a building is first constructed. But what about for all the residences where people currently live and there are no plans to take down walls and bring in professional contractors? In this case, Scott talked about a DIY alternative for Honeywell’s water sensor that detects whether you have a leak in your basement.

Scott Harkins: “We take two approaches. We have a consumer approach, or DIY approach, and we have a professional approach to market. Two big channels that we go to market with are, if we start with the water leak detector, we have two solutions. In the home, we have in a DIY manner, a WiFi-enabled product that can be purchased online, can be purchased at Home Depot. It’s literally about a one minute set up by the consumer via the app, uses Bluetooth for that, and it sits in a place where someone might fear a water leak.

“It has a couple of unique features to it. One is it is WiFi and yet it has a three-year battery life, which is pretty impressive and extensive. The second thing is it has what I call a tail, which is essentially a wire that hangs off of it a bit — it’s about four feet long — that if water touches anywhere along that line or along that tail, that’s also a water detector. One device can cover a pretty broad area, in fact, up to 400 feet.

“In a personal example, I would have it around my water heater in the basement that’s just below me. It also goes over to where my HVAC system is. One water detector is detecting two areas that are areas of likely leaks, maybe too much condensation from the AC or water heaters tend to fail by leaking. It’s WiFi connected and connected directly to the cloud. No use for a hub or some kind of control device.

“On the professional side, our security system — the Honeywell Lyric security system — has Z-Wave capability built into it, so we can talk to Z-Wave devices like lights and locks that you mentioned, but we also make a wireless water leak detector that talks in our security protocol, about the size of a matchbox, a water leak detector that can go around the home, talk back to the control center, both of these devices can be controlled by apps for the consumer. That particular one will send a signal back to a professional monitoring station if it does detect a leak. That monitoring center will have some process in place to respond to that. That talks to the panel, the control panel that’s in the home, then up to the Honeywell cloud, the Lyric water leak detector and freeze detector report via WiFi out to our cloud.”