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The company that has emerged as the biggest smart home player

The house of the future is being sold in the most old-fashioned way imaginable: By pounding the pavement and working the phones. So why are some of Silicon Valley's sharpest investors suddenly interested?

Published: Aug 2, 2016 06:24:40 AM IST
Updated: Jul 29, 2016 09:20:01 AM IST
The company that has emerged as the biggest smart home player
Image: Tim Pannell for Forbes
Travelling tech salesmen: Vivint Smart Home President Alex Dunn (left) and CEO Todd Pedersen

On the first warm summer week of the year in Provo, Utah, the headquarters of Vivint Smart Home appears quiet. It’s not till you make your way to the second floor that you stumble upon a flurry of activity. That’s where row after row of cubicles house mostly young men in their 20s, many sporting beards and tattoos. Some stand or pace about the room with headsets on, their eyes focussed on sales scripts. Others stare into the distance past suburban office parks and toward the scrubby foothills of the Wasatch Mountains. Above the cubicles, a monitor flashes the names and numbers of top salespeople. This year’s prize for the number-one seller is a trip to Hawaii.

It’s a pretty low-tech operation, especially when you consider these reps are selling the future. Along with an army of 2,500 door-to-door salespeople across the US and Canada (and a few in New Zealand), these 200 or so Utahans are aggressively pushing the Vivint smart home. They have managed to persuade more than a million homeowners to pay between $40 and $80 a month to have their houses come to life with internet-connected thermostats, lights, door locks, doorbells, garage door openers, cameras and sensors, whether they are made by Vivint or one of its partners.

Built on the back of a humdrum home security enterprise, Vivint has grown into one of the world’s biggest and most successful ‘smart home’ businesses, the most visible component to the average consumer of the burgeoning Internet of Things. Still private, Vivint was valued at over $2 billion in late 2012, and it hit $650 million in revenue last year, 16 percent more than the prior year. It recently attracted a $100 million investment co-led by billionaire tech investor Peter Thiel. In contrast to Silicon Valley’s gadget-obsessed innovators, who tend to agonise over product design and tech specs, Vivint has succeeded on the sheer power of its sales network. Its door-to-door salespeople spend long days proselytising the benefits of the smart home to anyone who will listen.

It’s not just the legion of peddlers that makes Vivint unique. The company owes its success, in part, to a business model that breaks with industry norm. Rather than sell individual devices, which can be pricey, Vivint relies on a subscription model. The company installs an average of $1,500 worth of hardware into a home—a mixture of gadgets made by Vivint and the likes of Nest and Amazon—and in return it charges a monthly fee that can total $480 to $960 per year. Customers sign a contract, which lasts between three-and-a-half and five years. Vivint doesn’t actually start making a profit until about three-and-a-half years into the relationship. It’s akin to carriers subsidising the price of a smartphone. It helps customers avoid the sticker shock of an expensive purchase, and it gives the company a recurring revenue stream. “We know that for the smart home to succeed, it has to be a service that’s delivered to the customer,” says Todd Pedersen, Vivint’s ultra-competitive co-founder and CEO. “We have to win business every day, every month, every year. We’ve done this for so long, and we know it’s complicated. To get lots of hardware to communicate and do it effectively in a way that delights the consumer is not easy.”

The company that has emerged as the biggest smart home player
Nest Cam: A security camera that lets you know if there’s any activity at home (and lets you look in) while you’re away. For $10 a month, Nest will hold on to 10 days of video history; for $30 a month, it will hold on to 30 days.

Silicon Valley has promised us the smart home for decades. One of the earliest proposed uses for the Apple II, in the late 1970s, was to add brains to the kitchen (largely by storing recipes), and ballyhoo about an internet-connected fridge that orders milk when you run low has erupted regularly since the dot-com bubble. Mostly the products have seemed like cumbersome technological solutions in search of a problem.

But now that seems to be changing. A flood of cheap web-enabled sensors connected to ubiquitous high-speed home networks have made the smart home feel less like marketing hype and more like a market opportunity. All the tech giants—Alphabet, Amazon, Apple and Samsung—are making major bets on the smart home. The results have been mixed. While there are compelling devices like Alphabet’s Nest learning thermostat and Amazon’s Echo smart speaker, none have gained mass adoption. For many consumers, the technology remains too expensive and too hard to install, and its value is still not always clear.

The recent struggles of Nest Labs, the poster child of the current smart home boomlet, serve as a cautionary tale. Led by Tony Fadell, a former Apple executive who helped design the iPod and the iPhone, Nest focussed on technology and design. Google, now Alphabet, acquired it for $3.2 billion in 2014. But one of its products, the Protect smart smoke detector, malfunctioned and had to be temporarily recalled. Later the company faced internal strife over its $555 million acquisition of Dropcam, which makes internet-connected security cameras, leading to several departures. Last month Fadell left, though he remains an advisor to Alphabet CEO Larry Page. While Nest is said to be growing at a 50 percent annual clip and is reported to have reached $340 million in revenue last year, it has not created a new product category since the Google acquisition. Strategy Analytics estimates it sold only 1.3 million thermostats last year. And it’s not alone in its struggles to reach a mass audience. As of now a mere 5 percent of US households have a smart home device, according to research firm Forrester. That number is expected to grow to only around 16 percent by 2021. “The reason the market is growing so gradually is because it can only grow as fast as people are willing to buy $100 to $200 accessories,” says Frank Gillett, a Forrester analyst. “Until the industry comes up with a different revenue model, it’s only people who are willing to upgrade their thermostat for $250, and most people aren’t.”

The company that has emerged as the biggest smart home player

Philips Hue lightbulbs: The Philips Hue Lightbulb was the first mainstream Internet-connected lightbulb to enter the market. With the push of a button, these lights can turn to almost any colour imaginable.

Vivint’s Pedersen is convinced he has found the model that will push the industry forward. At 47, he is an unconventional CEO. Broad shouldered and typically wearing a bright orange baseball hat with the Vivint name on the front, he looks better suited for off-road truck races—one of his hobbies—than for the executive suite. He recently experienced a tragedy while participating in a 500-mile off-road race in Baja California. In a manoeuvre intended to avoid a group of fans near the coastal city of Ensenada he ended up hitting three spectators, including an 8-year-old boy, who was killed. “My heart is torn up over it,” Pedersen says.

The company that has emerged as the biggest smart home player
Samsung’s Family Hub refrigerator: For $5,600, this fridge has more tech on it than is probably necessary. A giant, crisp touchscreen sits in front and can run apps and even browse the Web. Three cameras inside take pictures of your food.

While attending Brigham Young University in Provo, he paid for his education by cleaning houses and installing drywall. One summer between his sophomore and junior years, he drove to California to interview for a job selling pest-control services. He was turned down because the owner thought the young Pedersen wouldn’t be any good at it. The rejection was the spark that lit his entrepreneurial fire. He dropped out of the university and founded his own pest-control business in 1992 and began selling door-to-door with a group of friends. “I’m too competitive,” he admits. “It’s one of my faults.”

In 1999 Pedersen decided to transfer his sales know-how into the home-security business, which was booming in Utah. He transitioned his successful pest-control business into APX Security, which resold third-party home security systems built by the likes of GE and Honeywell. The business didn’t really take off until 2005, when Pedersen hired Alex Dunn, a veteran of the software industry who had served as deputy chief of staff for then-Massachusetts Governor Mitt Romney. Dunn brought with him the company’s first outside investment. Goldman Sachs and two private equity groups purchased a 50 percent stake for $25 million. The company used that cash to fund its early moves into the smart home. In 2010 it started selling its first pieces of smart home equipment, and a few months later APX became Vivint.

In late 2012 Blackstone bought out that 50 percent stake and added another 23 percent for a price just north of $2 billion, giving the previous three investors a return of 25 times their investment. All the while, Vivint’s management has maintained roughly 20 percent ownership of the company, with the largest chunk reserved for Pedersen at 12 percent. Forbes estimates Pedersen has a net worth of more than $250 million.

With the 2012 deal, Goldman Sachs also brought a debt facility for Vivint to fund its business model. It takes the company more than three years to start making a return on an installation. That means Vivint is burning through cash and is not currently profitable. In 2015 it had more than $650 million in sales, but its operating costs were more than $760 million. “There’s lots of cash going out and not as much coming in,” Dunn says. “But when you take a look at the unit economics over the lifetime of a customer, it’s very profitable.”

With the money from Blackstone and the public debt market, Vivint has expanded into other businesses, such as internet services and solar installation. Vivint Solar spun out as an independent unit and went public on the New York Stock Exchange in 2014.

There have been bumps along the way. Vivint has been subjected to numerous lawsuits and customer complaints that centre on over-aggressive salespeople and misleading sales pitches. Last year it settled a class action, of $6 million, for so-called robocalling. Vivint denied wrongdoing. The problems are similar to those faced by others with door-to-door sales models. “They have the same issues that everyone that does this has,” says Jane Driggs, president of the Better Business Bureau in Utah, which gives the company an A– rating.

The company that has emerged as the biggest smart home player
Google Home: Google’s answer to the Amazon Echo, Home is a smart speaker that’s always listening. Ask it to, say, play a song or get the rush-hour traffic conditions. It will integrate with all the Nest smart home devices, too.

But pounding the pavement is becoming less important to Vivint as more consumers start to seek out gadgets on their own. The fastest-growing part of Vivint’s business is coming from inbound calls to its call centre—in other words, people who actually want to buy from Vivint rather than have to be persuaded to buy from it. The number of customers acquired through the call centre is up 89 percent year over year. At this point, Vivint gets 65 percent of its business from door-to-door and 35 percent from the call centre.

As a result, the quality of Vivint’s technology is becoming more important than the size of its sales force. That means forging closer ties to Silicon Valley, but as a door-to-door reseller of (mostly) other people’s tech it has a hard time being taken seriously there. Beginning in 2015 Pedersen and Dunn made monthly pilgrimages to the Bay Area to talk with venture capitalists and tech players. They were getting turned down over and over again. “People were dismissive,” says Pedersen. A breakthrough came with Peter Thiel, whom they first met in early 2015. Thiel agreed to co-lead a $100 million investment in Vivint along with Mitt Romney’s Solamere Capital, whose investors include HP Enterprises CEO Meg Whitman, Sun Microsystems co-founder Scott McNealy and former Walmart CEO Lee Scott. “If you took out this idea that this is a technology business, Vivint would continue to show great results,” says Spencer Zwick, a Solamere Capital managing partner. “We believe there’s a growth story here. It’s a company that is no longer just an alarm-monitoring business but a leader in the smart home.”

The company that has emerged as the biggest smart home player
Haiku Ceiling Fan: This fan knows where you are. It has an infrared motion sensor to keep track of occupancy, and then ambient temperature and humidity sensors help keep the room at a comfortable temperature.

The biggest successes in the smart home so far have been sleekly designed devices that have managed to seduce young, tech-savvy consumers. None has achieved quasi-iconic status faster than the Amazon Echo, a cylindrical speaker equipped with a set of microphones and powered by Alexa, an ‘intelligent’ voice assistant. You can tell it to play music from various apps, turn on the lights, check the weather and traffic, or order an Uber. Since it’s always connected to Amazon’s servers, its capabilities are updated every week. With an estimated 3 million units sold since it was introduced in late 2014, it’s been such a hit that Google has already announced a competing product called Google Home. Apple is also said to be working on an Echo rival, powered by Siri.

The company that has emerged as the biggest smart home player
Belkin WeMo smart slow cooker: It’s a Crock-Pot with a Wi-Fi chip. so now you can keep track of how your meal is cooking while you’re at work.

Vivint doesn’t focus on any individual device but rather on many—and, more important, on ensuring that they work together as simply as possible. Inside their “innovation centre” in Lehi, Utah, almost 20 miles north of Provo, some 400 engineers and product designers—veterans of consumer-focussed companies like Nike, Disney, Amazon and Microsoft—are working on a slew of hardware and software projects. As the company has bet its future on the smart home, it is moving deeper into building its own devices. While its products aren’t as flashy as those coming out of Silicon Valley, Vivint makes a handsome thermostat, security camera and doorbell camera. Low cost and ease of use are paramount. “Everything we’re focussed on is how to create a mass market,” says Matt Eyring, Vivint’s chief strategy and innovation officer.

The best way to understand the scope of Vivint’s ambition—and how it hopes to push into the mass market—is through a demonstration smart home at the Lehi innovation centre. As you walk up to the front door, a Vivint doorbell detects you and sends a push notification to the home-owner’s phone. A camera embedded in the doorbell beams your image to the phone, so the homeowner can see you. If the owner requests, the door unlocks itself (with a lock made by Kwikset) and the Vivint thermostat adjusts the temperature to a comfortable setting. Sensors placed around the home detect motion and whether a window is open or closed. A Vivint camera sits on the shelf monitoring the house while the user is away. There’s an Amazon Echo that can control the garage door. A display panel made by Vivint sits next to the front door, showing the security-camera footage and allowing the user to manage the house without the phone. You can tell Echo you’re going to sleep and, as if by magic, your dead bolts will lock, your security system will arm itself, the thermostat will drop a few degrees and the lights will dim gradually, giving you enough time to make it to bed without tripping over the furniture. Your alarm clock will be set, too. “All this is cool,” says Eyring, “but it’s just the start.”

Indeed, there is still too much in the smart home that is unnecessarily cumbersome. Having a smart lightbulb that you can turn off from your smartphone may be a cool parlour trick, but it’s not really that convenient compared with flipping a switch. But Eyring and his crew are thinking about more compelling scenarios, powered by software and artificial intelligence. “The smart home doesn’t really exist yet,” says Eyring. “The connected home exists. The remote-control home exists. But we’ll see in the next six to eight months the first true smart home. It’ll be coming along in the next wave.”

(This story appears in the 05 August, 2016 issue of Forbes India. To visit our Archives, click here.)

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