Control4 CEO Cites 10-Year Product Development Edge As Apple, Google Rumors Swirl

Following Google’s buy of Nest earlier this year, and a week ahead of a much-rumored announcement from Apple that it plans to enter the home automation market, Control4 is banking on its 10 years of experience in the space to keep it ahead of the pack, CEO Martin Plaehn told investors Thursday at the Cowen investor conference in New York. “The Internet of Things is a global phenomenon, and everything with a battery or a power cord is going to become network-aware,” Plaehn said. Saying the “biggest companies that produce valuable and highly used products are also going to jump into this space,” Plaehn said the opportunity to tie devices together will “get larger and larger as more products become network aware.”

Control4 is looking at the impending arrival of Google, Apple and others as a validation of “how large the opportunity is” and how “inevitable and ubiquitous” connectivity will become, Plaehn said. “The best products, services and ecosystems are going to win,” he said, saying it’s a “formidable challenge” to get products to integrate with each other and to “orchestrate them across brand boundaries.” Control4 has roughly a decade head start, he said.

Plaehn conceded it will take serious marketing to get the Control4 brand in consumers’ consciousness along with the likes of Google, Nest and Apple. Neither Plaehn nor Chief Financial Officer Dan Strong pegged the marketing budget required to take on the giants, but Strong said the company needs to spend more on consumer awareness and that’s not an area of the spreadsheet where the company plans to trim numbers.

Control4 has a goal to reach installations in five per every thousand U.S. homes, which would make it “an enormous company,” Plaehn said. Forty-two percent of Control4 customers have annual household income above $250,000, and another 45 percent have household income in the $100,000-$250,000 range. The company is starting to see some uptake in the “just below $100,000” segment, which Plaehn defined as a young professional who bought his first condo. Plaehn sees an open sky of opportunity, coming from 10 million U.S. households with incomes above $150,000 “and a lot more below.” The same numbers “likely” translate to international markets, including Barcelona, Beijing, Berlin, Copenhagen, Hong Kong, London, Paris and Shanghai, he said.

Control4’s strength is its “Simple Device Discovery Protocol” (SDDP), which it has “licensed liberally” to CE companies that want it, Plaehn said. He called SDDP “lightweight” in that it can integrate into a TV, music device, thermostat or security system without requiring a lot of engineering by a third-party company. “When you put a device on the network, it announces itself to the control system on that network,” Plaehn said, comparing the process to a PC finding a connected printer and automatically installing the required drivers. Control4 launched SDDP 15 months ago and has 80 companies on board with 300 devices. Recent additions include several security camera companies, but “big announcements” are coming, Plaehn said. He declined to name AV companies in the pipeline but gave the example of a consumer buying a Samsung TV at Costco in the future, taking it home, plugging it in and having a Control4 system automatically recognize and configure the TV to work on the platform. The company is on a 10-company-per-quarter pace with SDDP, he said.

The cost structure of the Control4 platform is built around $750 and $1,500 hubs that are the brains of the system and then solution products that communicate on the network over Wi-Fi, ZigBee, Z-Wave, infrared or RS-232 protocols. Hubs are 37 percent of product revenue, and there’s no additional cost to consumers “except for installation and customization,” Plaehn said. “When you hear about the cost of home automation, it’s not the hub, it’s the end points,” he said. Consumers can use any certified third-party products on the network, but lighting systems have to use $125 Control4 switches, he said. Installation per switch adds another $25, he said. “They add up quick,” he said, saying a 40-light system would cost $6,000. According to Strong, 50 percent of Control4 installations cost an average $4,000. “A lot start small and then they can add over time,” he said.

Currently, margins are similar between control hubs and solution products like thermostats, but over time the latter will become a larger percentage of system totals as consumers add more devices to their homes, Strong said. The model is not a razor and razorblade one “where the platform has a lower margin than the product around it,” he said. If customers automate an HVAC system, they can buy a connected thermostat from Control4 or they can use one from Nest or Honeywell at no additional cost, he said.

Key drivers for wider adoption of Control4 systems are continued development of “compelling software;” technological advances to speed up installation time and reduce complexity and errors for improved efficiency and profitability; and further adoption of SDDP, Plaehn said. Broad SDDP adoption by manufacturers will “set the stage” for the next phase where consumers can “add devices to the connected home easily,” he said.

On product life cycles, Plaehn said the company’s goal is for hubs to have a useful life of “much more than five years, and we're getting better at it.” He defined three “lenses": a product’s competitive life in the sales field 24-30 months, a product’s useful life before a consumer thinks technology has moved away from him (36 months to four years) and the operational life “before it wears out (five to 10 years). The goal is to make hubs like appliances with the lifespans of dishwashers, heating systems or air conditioners, Plaehn said. The company provides software updates continually at no charge, Strong added.

While Control4 would like to enable a do-it-yourself scenario for consumers, that will happen on a case-by-case basis, Plaehn said. He cited the example of installing motorized drapes. Installing electric blinds is the same as it was 25 or 50 years ago, he said. “Just because you add a radio doesn’t make them easier to install,” and customers would be best served by professional installation of solution products such as drapes or electronic door locks, he said. A connected baby camera would be a simpler consumer add, he said.

On Control4’s plans for control from the cloud, Plaehn said reliability remains an issue. The company offers a subscription service that enables consumers to control their systems from anywhere in the world but moving actual control to the cloud is trickier, he said. “We want to make sure it’s reliable,” he said. If someone hits a light switch and that communication has to go through a control structure, it could impede a fast process consumers have come to expect, he said. “I want that to work all the time … like a faucet,” he said.