Icontrol, a leader in security and home-automation services, was supposed to be sold by now. Erstwhile competitor Alarm.com (Nasdaq: ALRM) was to buy part of the company and Comcast/Xfinity would buy the rest of it.
Last month, however, Honeywell – yet another competitor in the SHaaS (smart home as a service) business – sued Icontrol and Alarm.com to halt the deal, claiming the merger would violate antitrust laws.
Honeywell seeks, at the very least, a preliminary injunction to postpone the deal.
Icontrol and Alarm.com just responded to the Honeywell suit in the New Jersey District Court, claiming that a merger would not give the two companies a 70% market share, as Honeywell suggests, because the SHaaS market is far bigger than Honeywell defines it.
The Players, The Products
Icontrol and Alarm.com provide cloud-based solutions that integrate professionally monitored security systems with home-automation systems for remote access and control.
One version of Icontrol’s SHaaS platform (Connect) powers systems from ADT and a handful of smaller providers. That is the business that would be sold to Alarm.com.
The other version (Converge) powers systems from cable companies and telcos, with Comcast/Xfinity being the biggest customer. That is the business that would be acquired by Comcast.
Both platforms do pretty much the same things. And those two things are pretty much what Alarm.com does – cloud integration and remote management of security and home automation. Honeywell, too, offers pretty much the same thing with its Honeywell Total Connect platform.
While Icontrol sells through enterprise customers like ADT and Comcast, both Alarm.com and Honeywell sell through thousands of independent security dealers.
None of the providers offers its products and services directly to consumers, with the exception of Icontrol’s newish Piper business (which also would be acquired by Alarm.com). They all sell services almost exclusively as part of professionally installed and professionally monitored security systems.
The Alleged Smart Home Market
In the scheme of things, that market – professionally installed and monitored security systems – is about 20% of U.S. households. The extra “interactive” element provided by Alarm.com, Icontrol, Honeywell and others, is a fraction of that market – maybe as small as 25%* of the 20% of households with monitored security systems, claim the defendants.
So when Honeywell claims that a combined Alarm.com and Icontrol would command 70% of “the market,” they are referring to a market that is about 5% of U.S. households. A merged company, then would own about 3.5% of U.S. households, according to Honeywell’s math.
In essence, Icontrol argues: 1) That’s a very small and narrowly-defined market to begin with and 2) Even that small market size is overstated.
Honeywell forgets, for example, that Comcast would be getting a decent chunk of the Icontrol business, according to the defendants.
Comcast, then, would emerge as a major competitor to Alarm.com, especially as Comcast seeks to recruit other cable companies, utilities and big players into the market using the Icontrol Converge platform.
The defendants reference a Comcast press release that states the acquisition will help Comcast “deliver new features, products and services to both individual Xfinity Home customers and enterprise-level Converge customers, faster than ever before.”
The defendants go on: “Because the proposed merger actually promotes competition rather than harming it, the public interest plainly lies in allowing the merger to close.”
The overarching argument against Honeywell's antitrust claims is this: The “market” is so much bigger than 3.5% or even 20% of U.S. households.
It is true that Alarm.com (with Icontrol) would continue to dominate that portion of the market in which it currently plays. But the defendants point out that there is so much more, including (again!) offerings from cable companies and other “utilities.”
Most notably, the DIY market for remote home-control services is surging, thus threatening the likes of Icontrol, Alarm.com and Honeywell if they continue with business as usual.
Icontrol and Alarm.com have no intention of proceeding with business as usual. They’re both pursuing the DIY market, for example.
Meanwhile, if you believe Icontrol and Alarm.com, Honeywell is stuck in a business-as-usual mindset, judging by its very perception of the market size (professionally installed, professionally monitored security systems with interactive home services).
Honeywell, furthermore, has not followed industry trends by moving to a more open platform for its services. Currently, Total Connect only works with Honeywell’s own security panels.
Honeywell argues at length in its antitrust case that it has intended to go to a more open platform, and that a combined Alarm.com/Icontrol would make it harder for Honeywell to do so.
Too bad, so sad, argues Icontrol and Alarm.com … and the majority of those who commented on social media to our original story on the Honeywell suit.
On CEPro.com, one reader comments, “Alarm.com had the foresight to see that it was crucial to integrate with third party vendors, while Honeywell stubbornly adhered to proprietary equipment. Now that they see the error in their ways and that they made poor business decisions, they seek to punish the competitor who saw and capitalized on future trends.”
In any case, as Icontrol notes:
As for the alleged move to open architecture, Honeywell employs language so vague that it is far from clear that Honeywell has actually adopted such a plan. But even if and when it adopts such a plan, Honeywell acknowledges that it will take two years to come to market. A theoretical problem that Honeywell may face in two years’ time is not imminent harm.
Proof of imminent harm is required for a successful antitrust claim.
The Actual Market
We won’t go over all of the competitors and potential competitors facing Icontrol, Alarm.com, Honeywell, their competitors, their dealers, and the traditional security business in general.
Instead, the wild growth in the smart-home market, “has attracted a large, diverse set of emerging competitors into the provision of remote services, which Honeywell completely ignores,” defendants argues. “Indeed, consumers are increasingly adopting remote services through their smart devices (e.g., Samsung Smart Things, Amazon’s Alexa, Apple HomeKit, and Google’s Nest Thermostat) instead of obtaining these services through traditional security systems.”
At the end of the day, the defendants say, “Honeywell’s market definition improperly focuses on a single distribution level, excludes downstream competition, and outright ignores fundamental market definition principles.”
And, well, Honeywell’s “critically flawed” market-share calculation “inexplicably accounts for only half the proposed transaction. Through the transaction, Alarm.com proposes to acquire certain assets from iControl, while Comcast proposes to acquire the rest.”
[Update] What about those Patents?!
Shortly after posting this article, a friend and industry consultant Avi Rosenthal wrote to me: “They have completely missed the point. Honeywell should be arguing the IP point that the new company will control too many of the critical IP patents in the industry. This is not about current market share or size it's about the ability for others to enter and innovate in the space without the fear of a lawsuit.”
Indeed, the extensive patent portfolio of a merged Icontrol and Alarm.com is — or should be — the scariest thing to (would-be) innovators in the smart-home business. The companies have shown a propensity to sue for infringement.
That threat was not lost on Honeywell, which claimed in its antitrust suit that a combined IP arsenal could cripple innovation.
Curiously (or not), the defendants barely mention the patent situation in their reply, other than as footnotes involving agreements with ADT.
Even though the document was heavily redacted, there seems to be few clues suggesting the very real patent issue was addressed by Icontrol and Alarm.com.
We do know that Alarm.com is acquiring some Icontrol patents as part of the deal, but many of the key patents owned by both companies are shared already through cross-licensing agreements from a few years ago. It's unclear how much the un-shared Icontrol patents would boost Alarm.com's IP position in the IoT marketplace.
We also don't know the patent arrangements with Comcast post-acquisition.
Here's all we get from the Icontrol and Alarm.com filing:
Through the acquisition, Alarm.com would acquire iControl’s Connect and Piper business units as well as several iControl patents for $140 million, and Comcast would acquire the remaining iControl entity, which includes the Converge business unit and the majority of iControl's intellectual property.
Bottom line: The shared IP portfolio between Alarm.com and Icontrol is already scary. Will it blow up to antitrust-worthy proportions? If so, what would be the remedies?
A Few Other Things
The market definition is at the crux of the defendants' answer to Honeywell, but Honeywell had other claims as well.
One of them is that, when ADT moves to the Alarm.com SHaaS platform, Alarm.com will practically force it to use different hardware that is already supported by Alarm.com. Today, Honeywell supplies hardware for ADT’s Pulse system, but Alarm.com currently does not support Honeywell hardware.
The defendants claim ADT will make any hardware decisions on its own, noting:
“Honeywell claims that the proposed merger will provide Alarm.com with ‘both ability and incentive to drive out Honeywell hardware by denying interoperability with the Alarm.com Remote Services platform. [redacted] this harm has nothing to do with Honeywell’s ability to compete in the relevant market that it defines – Remote Services.”
There’s another thing: Honeywell “dwarfs Alarm.com and iControl in size,” the defendants point out. “Honeywell produces as much profit in a single day as Alarm.com produces in an entire year.”
Or, as someone posted on Twitter, “95 billion dollar company suing a 1 bilion dollar company [market cap] on antitrust grounds, cry me a freaking river $HON”
Honeywell, “a household name,” had revenues of over $39.3 billion in 2016. Its Home and Building Technologies segment, which includes home security and automation, generated revenues of $10.6 billion in 2016.
Alarm.com was projected to generate about $255 million in revenue for 2016. Icontrol does not report its financials, but it has fewer SHaaS subscribers than Alarm.com, presumably earns a lot less money per subscriber, and definitely sells a lot less hardware.
Alarm.com is paying $140 million for Icontrol Connect and Piper. Comcast has not disclosed the acquisition price of Icontrol Converge.
Incidentally, “Both of the transactions are contingent on the closing of the other.”
If the Alarm.com deal collapses, so does the Comcast acquisition.
*As the defendants write: “Honeywell admits that approximately 75% of the home security services systems sold through the dealer channel do not employ remote services.”