The proposed merger of two giant SHaaS (smart home as a service) providers, Icontrol Networks and Alarm.com (Nasdaq: ALRM), may be halted if Honeywell Security has its way. Honeywell, another leader in cloud-based security and home automation, is suing to block the merger, which would result in a “classic violation of antitrust law,” Honeywell claims in a lawsuit filed in the U.S. District Court of New Jersey.
CE Pro reported recently that the Federal Trade Commission was scrutinizing the proposed merger, which was originally announced in June 2016. The deal would have Alarm.com acquire Icontrol’s Connect business, which currently services ADT and other large providers. Alarm.com also would acquire Icontrol’s Piper DIY business, featuring a self-contained security, surveillance and home automation device backed with a cloud service. The price: $140 million.
Update 3/2/2017: Icontrol, Alarm.com Respond to Antitrust Suit
Comcast/Xfinity would acquire Icontrol’s Converge business, used by Comcast itself, as well as other large cable companies and telcos.
“As a result of the proposed acquisition,” Honeywell claims, “Alarm.com would have approximately a 70% share in the market for the provision of Remote Services for dealer installed security systems. The creation of such concentration, which would injure competition, stifle innovation, and result in higher prices to consumers, is presumptively illegal.”
Honeywell claims Alarm.com controls about 38% of the market for interactive security and home-automation services, and Icontrol controls about 32%. Alarm.com claims to have more than 2.6 million subscribers. Icontrol has not publicly disclosed its customer numbers, but Honeywell’s estimate would put the number at about 2.2 million subscribers, which meshes with CE Pro’s own estimate.
Elsewhere in its lawsuit, Honeywell refers to the “remaining 18% of the market,” suggesting Honeywell (which does not report subscriber numbers) has a 12% market share, or roughly 820,000 subscribers.
The plaintiff seeks to permanently enjoin the proposed acquisition because the “unavoidable – and intended – result” would be to diminish competition. A merger would harm Honeywell in particular, the company claims:
In this position, Alarm.com would be able to demand that third party manufacturers of security hardware and smart-home devices interoperate exclusively with Alarm.com. Alarm.com thus would be able to use its dominance to bind third parties to its platform, diminishing Honeywell’s ability to compete, and further cementing its monopoly power by crippling its sole remaining significant competitor.
Honeywell notes that a united Alarm.com and Icontrol would exacerbate barriers to entry in the SHaaS category:
Start-up costs: The remote services business is expensive to begin with. Icontrol, Alarm.com and Honeywell took many years and millions of dollars to build out their services.
Intellectual property: Both Icontrol and Alarm.com have an extensive portfolio of patents that could be used “aggressively to thwart potential competitors. CE Pro has reported on these patents and their use in patent-infringement claims against competitors.
Customer switching costs: Honeywell notes that “it is difficult to convert existing Remote Services customers to a new platform,” given customers usually sign long-term contracts in the first place, and don’t bother to switch providers later on.
Dealer switching costs: It’s much simpler for security and smart-home integrators to specify a single ecosystem of hardware and cloud services. They usually support only one ecosystem and one service provider. “Consequently,” Honeywell claims, “it is unlikely that a new entrant would be able to convince a dealer to carry the entrant’s platform in addition to the dealer’s existing Remote Services offering.”
CE Pro has reported on other up-and-coming SHaaS providers — Napco iBridge, Zonoff, Telular/Telguard, MiOS and SecureNet to name a few — but none has yet made a major dent in the marketplace.
Honeywell Has Plans to Open its Architecture
Honeywell notes in the lawsuit that Alarm.com and Icontrol employ open-architecture platforms, supporting multiple alarm panels (2Gig, Interlogix, Qolsys, DSC) and peripherals from scores of vendors.
Honeywell’s closed architecture, on the other hand, requires dealers to use Honeywell’s own security and home automation panels, although several third-party Z-Wave and IP devices are also supported.
But Honeywell claims in the suit that it is planning to open its ecosystem to more third-party products, but vendors could be reluctant to work with Honeywell when they can instead support a single SHaaS provider with a 70% market share:
Honeywell has explored the possibility of moving to an open structure and developed concrete plans to do so. … It has made plans to open its system to third party security hardware manufacturers as well so as to give customers the option to use Honeywell security hardware with third party Remote Services and vice versa. Honeywell has looked closely at both organic development and outside acquisitions as potential strategies for expanding into open architecture. …
As a result of the merger, a very large share of Remote Services will be provided by a single company. Security hardware and smart-home device manufacturers can be expected to want to make their products compatible with the dominant Remote Service platform. But then they will have to choose whether to invest additional time and money to make their products compatible with the Honeywell and other Remote Services software platforms. As a result of the merger, these third parties will be able to reach a significant share of the Remote Services customers by interconnecting with the one dominant firm. Incentive to invest in interoperability with multiple players will greatly diminish. Firms that do not currently interoperate with Honeywell will have little reason to invest in creating interoperability; and device manufacturers that currently interoperate with Honeywell will have less reason to invest resources into maintaining interoperability.
Here’s the crux of Honeywell’s argument:
Absent the merger, Honeywell stood poised to open its platform to third party security hardware, through either organic development or acquisition of the necessary assets. There would have been at least three substantial open architecture competitors: Alarm.com, Icontrol, and Honeywell. Entry also would have remained possible for others.
With the merger, the combined Alarm.com / Icontrol firm would foreclose Honeywell’s transition to open architecture. Instead of three open architecture alternatives and genuine competition, there would be one dominant firm exercising monopoly power over customers and stymieing any nascent competitive threat.
Big Concerns over ADT
While Icontrol does not work with Honeywell’s standard security and home automation products, Honeywell has worked with ADT over many years to create special products that would work with Icontrol. These products have become the core offering under the ADT Pulse service.
Honeywell feels the ADT relationship could be jeopardized by an Icontrol/Alarm.com merger.
The lawsuit notes that ADT plans to transition from Icontrol to Alarm.com software if the acquisition closes, and that ADT will make a five-year commitment to Alarm.com. Honeywell hardware, however, is not currently compatible with Alarm.com.
“Another lengthy, costly, and difficult project would be required to establish interoperability,” Honeywell alleges. And that's only if Alarm.com even “allows” such a project to go forward:
The merged company would have the ability to thwart the effort to establish interoperability. Alarm.com can refuse to cooperate outright. It can also sabotage the project in myriad ways that are subtler and more difficult to detect: by committing fewer resources than necessary, by withholding critical information from Honeywell, by making design decisions that hamper interoperability with Honeywell hardware, and more.
Before the merger, Icontrol and Alarm.com couldn’t play such games because potential partners could simply switch to the other provider. That would no longer be the case.
“If the dominant merged firm takes steps to make interoperability difficult or impossible for a hardware manufacturer such as Honeywell,” the plaintiff says, “neither Honeywell not [sic] the security system dealer (ADT) will have the choice of selecting another viable open architecture Remote Services platform.”
Here’s the kicker: CE Pro broke the news this year that Alarm.com has an ownership stake in Honeywell competitor Qolsys. Honeywell fears that Alarm.com will therefore convert ADT to Qolsys hardware.
“Control over interoperability gives the merged company the means to do so,” Honeywell alleges.
Losing the ADT business could be devastating for Honeywell, which derives a “significant portion of Honeywell’s hardware sales” from ADT:
The lost revenue that results from being shut out of ADT’s business will effectively devastate Honeywell’s security business and its ability to meaningfully invest in product development and upgrades. Honeywell’s inability to invest in its products starts a vicious cycle wherein Honeywell’s products becoming less desirable, which in turn leads to further decreased demand and revenue, and leaves even less funding for future product investment. Eventually, the result is that Defendants’ only meaningful competitor, Honeywell, must bow out of the market entirely. This loss of business is also an irreparable harm.
With the merger imminent, Honeywell hopes at the very least that a temporary injunction will be ordered, allowing time for the parties to address potential anti-competitive effects.
It is unclear at this time if Comcast's propsed acquisition of Icontrol's Converge platform is also in jeopardy.
UPDATE 2/23: In an SEC filing, Alarm.com noted the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which had been extended by the FTC: “With the expiration of the HSR Act waiting period, the parties are proceeding with activities required to close the Acquisition.”
In reference to the Honeywell lawsuit, Alarm.com says in the latest filing that it “intends to defend itself vigorously in this matter.”