Control4 Seeks Expansion Via Lighting, Security Retail Channels

Google’s entry into the home automation market is a “clear indicator” that the connected home “is a long-term trend,” said Control4 CEO Martin Plaehn, during a Q-and-A session after a presentation at the Needham Growth Conference in New York Tuesday. Google announced Monday it agreed to buy Nest Labs and that Nest CEO Tony Fadell, who was on the iPod development team at Apple, would continue to lead Nest after the purchase that’s expected to close in the next few months.

"Google and Nest are both very, very innovative and smart companies,” Plaehn said, saying Google has been laying the foundation for businesses that will be “big a decade from now.” Regarding the home automation installation market that Control4 has played a major role developing, Google’s Nest acquisition “is a validator of the ideas we put forth in the early 2000s,” Plaehn said.

Control4 demonstrated integration with Nest’s popular thermostat at CEDIA Expo last September, becoming the first company to show Nest integration following the latter’s high-profile announcement at CEDIA that it would open its API to third-party companies (CED Sept 26 p1). That announcement was controversial among CEDIA installers, with some seeing the inexpensive, self-installable Nest thermostat and its mainstream-focused business model as a threat to the traditional CEDIA-level residential installation business. But Control4 embraced Nest’s coming-out party last September, with Eric Anderson, Control4 senior vice president-products, telling Consumer Electronics Daily that Nest’s opening its API “is going to please a lot of people.” He cited the “cool” factor Nest thermostat design brought to the staid home thermostat category.

With Nest’s intellectual property now about to be owned by an emerging home control Goliath, Plaehn downplayed the threat that Google’s acquisition presents to the already-shifting market that’s seen the likes of AT&T, Verizon, Lowe’s, Staples and Comcast move in over the past year or so. The home automation market is a “large opportunity,” Plaehn said. “It’s not a winner-take-all or a zero-sum game.” Control4 Chief Financial Officer Dan Strong quipped, “We like the valuation,” referring to Google’s $3.2 billion agreed cash purchase price.

In his presentation Monday, Plaehn cited a “dramatically different” home automation market than the one that was once priced only for the “ultra-rich.” When Control4 began shipping product in 2005, the cost of an installed home automation system started at $100,000 and went to $150,000 or more, Plaehn said. Today, 45 percent of U.S. Control4 customers have annual household incomes between $100,000 and $250,000, while 42 percent are “very, very high net-worth individuals with strong incomes.” But the trend for more affordable home automation is moving south, with some 13 percent of Control4 customers fall into the sub-$100,000 annual household income level, Plaehn said.

At the bottom 50 percent of Control4’s business, consumers spend on average $3,500 for product, installation and personalization, Plaehn said. Of that, Control4’s share is $1,400 for product and software, he said. The middle tier of customers spend an average $9,600 for a multi-room solution or small home, with Control4 netting roughly $4,000, he said. At the high end, the average spend is $22,500 of which the company gets about $9,000.

As more companies pursue the enormous mainstream home automation segment, Control4 expects to be competitive at that level and wants a significant piece of that market share, Plaehn said. “We're pursuing bringing home automation to the broad class of homeowners,” a strategy the company is applying to North America, Europe, China, India and Latin America, he said. He said Control4 is an open platform that supports more than 6,500 devices from “hundreds” of manufacturers and is scalable, with installations in homes, multi-dwelling units and large estates in 80 countries.

Control4’s business has been driven largely by audio, video and home networking, but the company is looking to expand its reach in lighting, security and temperature control, Plaehn said. Most of its 2,300 U.S. dealers specialize in AV and home theater, but Control4 wants to expand its market share by adding dealers with additional specialties including security and lighting. Lighting offers a unique opportunity due to the transition from incandescent bulbs to “digital LED lighting,” he said. “When consumers realize that they can program their lighting, we'll be ready to serve them with their automated home,” he said.

Plaehn characterized the home automation channel as “high velocity,” noting that within 45-60 days of a product introduction “we have 30-40 percent penetration” of the product through the dealer channel. By 120-150 days after launch, there’s nearly 100 percent penetration of new products, he said. The dealer channel is represented by 45,000 people in independently owned companies that range from 10 people to more than 100, he said. The company expects to easily multiply its customer base of 10,000 and “eventually serve millions of customers,” he said.

The core of the Control4 product line is its software platform, accounting for 40 percent of product, with the remaining 60 percent comprising peripheral and solution products, said Strong. The top 100 dealers generate 24 percent of revenue, and the business has a “very long tail,” he said. “As we go into more and more homes and establish that platform, it provides a nice recurring revenue source as we sell solution products” later on, he said.

From September 2012 to September 2013, Control4 revenue was up 18 percent with core revenue through the residential dealer channel up 19 percent, Strong said. Gross profit for the period grew 26 percent and adjusted gross margin rose to 50 percent from 47 percent, he said. Operating margin went from break even at this time last year to 6 percent by September 2013, he said.

Control4 will continue an aggressive push into international markets, Plaehn said, and wants to establish the brand in emerging markets prior to the widespread expansion of home automation down the road. The company will continue to introduce new products and services this year as the company looks to the growth of the business in the U.S. and abroad, both of which are “underpenetrated” areas for home automation, Plaehn said.

Speaking to potential conflicts of interest among dealers who sell Control4 along with other manufacturer’s home automation products, Plaehn said Control4 differentiates itself as a product and platform through the “broadest choice of devices for interoperability” and what he called the broadest set of tools for dealers to personalize systems for end users. The platform uses high-level rather than “assembly language programming,” which allows dealers to “stamp out homes much more quickly,” he said. “It’s all about scale and velocity,” Plaehn said, quoting dealers who say they “want to get in and out and get paid. If we can deliver a solution in a day versus a week that makes a huge difference to our channel,” he said.

On competition from bigger CE players such as Samsung and their plans for home automation, Plaehn said, “When you look at big companies … how are they actually going to get a product that incorporates third-party products other than theirs into thousands of homes?” Companies will have to form partnerships to get their connected products into consumers’ homes and what companies “are going to eagerly … interoperate with Samsung?” he asked rhetorically. “Is LG going to do that? Is Sony going to do that?” Natural opposing forces will stand in the way of “certain classes of companies to solve the kind of problem that consumers need in the connected world,” he said. And service providers who try to provide a connected home offering will deliver a “very narrow solution,” he said. “As soon as the consumer wants new device X from Apple or new device Y from LG … the cable company’s going to say, ‘That’s not on our list'” he predicted. That should lead to more opportunity for Control4, which is interoperable with hundreds of companies, he said.