The FTC is scrutinizing the proposed acquisition of Icontrol Networks by Alarm.com (Nasdaq: ALRM) and Comcast. It’s no wonder. Icontrol and Alarm.com are today’s undisputed leaders in the SHaaS (smart home as a service) business.
Alarm.com sells through thousands of professional security dealers and home automation installers, while Icontrol has a lock on the mass-market providers, including cable companies and telcos.
Alarm.com went public in 2015. In June of this year the company, along with Comcast, said they would acquire Icontrol, with Alarm.com getting the Z-Wave platform used mostly by ADT, and Comcast getting the ZigBee platform used by the big service providers.
Six months later, however, the deal is still working its way through regulators.
An FTC green-light is no certainty, given the companies’ large customer bases and broad IP portfolios.
Currently, Alarm.com has more than 2.6 million subscribers, and Icontrol is thought to have about the same or slightly less. In terms of intellectual property, the two companies own a big chunk of very important IoT patents (some jointly) for cloud-based monitoring, management and integration of security and home automation services.
Alarm.com, Icontrol Patents & Lawsuits
After suing each other for patent infringement, Alarm.com and Icontrol agreed to cross-license their IP in 2014, giving them joint ownership of technology for integrating monitored security systems with home automation.
Despite their tight lock on IP, the companies have not been as litigious as they could be, suing only those companies that pose a direct threat.
Icontrol sued would-be competitor Zonoff for patent infringement in 2014 and again in 2015 when Zonoff nabbed a deal with ADT to power a new DIY product from LG. The product would compete with Icontrol’s Piper system – a combo security/surveillance/home automation system sold direct to consumers.
The Zonoff lawsuit was referred to mediation, but is now on hold, pending the Alarm.com acquisition (or no later than February 24, 2017).
Icontrol also is suing would-be competitor SecureNet, the SHaaS that powers security/automation systems from Resolution Products and, most recently, 2Gig by Nortek. (2Gig also works with Alarm.com and Icontrol.)
SecureNet is challenging the patentability of several Icontrol claims, filing petitions for inter partes review (IPR) of all four patents in question. In November 2016, the Patent Trial and Appeal Board (PTAB) agreed to institute an IPR against all asserted claims of Icontrol’s patent #7,855,635, “Method and system for coupling an alarm system to an external network.”
IPRs are instituted when there is “a reasonable likelihood that the petitioner would prevail with respect to at least one claim challenged.” The PTAB could take up to one year to rule on the patent.
But it seems Alarm.com and Icontrol don’t hold all the SHaaS cards. Both are being sued on patent-infringement claims by at least two parties.
Icontrol and ADT are being sued by Applied Capital Inc., a finance company that claims the two companies infringe on its 2013 patent #8,378,817, “Premises monitoring system.”
That case is ongoing.
Alarm.com was sued in 2015 by one of its (erstwhile) biggest customers, Vivint, for allegedly infringing on these patents:
- 6,535,123, “Electronic message delivery system” (2003)
- 6,717,513, “Electronic message delivery system utilizable in the monitoring of remote equipment and method of same” (2004)
- 6,462,654, “Electronic message delivery system utilizable in the monitoring of remote equipment and method of same” (2002)
- 6,147,601, “Electronic message delivery system utilizable in the monitoring of remote equipment and method of same” (2000)
- 6,924,727, “Method for remote control of home-located electronic devices and a management facility” (2005)
- 7,884,713, “Alerting based on location” (2011)
Vivint this year moved to its own cloud-based solution, while continuing to license some Alarm.com IP.
As such, Vivint expresses concern about the acquisition, which “appears to dramatically reduce competition.”
Vivint has demanded all documents pertaining to the acquisition “to determine whether the transaction will eliminate a competitor.”
Vivint disagrees with Alarm.com’s characterization of the SHaaS market as “a densely crowded field of competitors.”
These comments were stated in a redacted motion filed in August 2016, in which Vivint claims the terms of the acquisition go to damages.
Without the asset purchase information, “Vivint cannot determine what assets were purchased and which patents were cross-licensed,” the company claims.
The requested documents “will be relevant to whether Icontrol, Vivint, or others compete or competed against Alarm.com and whether it has eliminated future competition through this transaction.”
Alarm.com has filed IPR petitions, and the case has been stayed pending the review.
New Hints About Proposed Merger
Both Alarm.com and Icontrol have kept relatively quiet about the acquisition since the June announcement, but Alarm.com provided a progress report in November during its Q3 2016 earnings call.
CEO Steve Trundle said the FTC continues to review the deal, and any approval would not come until Q1 2017 at the earliest.
Trundle also noted that ADT agreed to use Alarm.com exclusively for at least five years (with conditions) in the event of an Icontrol acquisition – a commitment that was key to Alarm.com’s offer to acquire Icontrol for about $140 million.
ADT was Icontrol’s first significant customer back in 2009 and now boasts more than 1.6 million subscribers to the Icontrol-powered Pulse interactive security and automation service.
ADT Canada, on the other hand, uses Alarm.com through a 2014 acquisition of Reliance Protrectron.
Also, Protection 1, which merged with ADT this year under the ownership of Apollo Global Management, has been a long-time Alarm.com reseller.
Steve Trundle says in the earnings call:
In June we announced that we've entered into a definitive agreement to acquire two business units Connect and Piper from Icontrol Networks.
We remain excited about this transaction as it will allow us to increase our R&D capabilities and accelerate our participation in the broad Internet-of-Things market. Recently we received a request for additional information from the Federal Trade Commission who is reviewing the proposed transaction. We are working to comply with their information requests and address all outstanding issues. However as a result of this additional request, we now believe that the deal may be delayed until the first quarter of 2017 and we are unable to predict the schedule or other elements of the HSR process with certainty. We'll continue to work this process and will update when there are material developments.
During the third quarter of 2016, we also amended our existing master services agreement with ADT. The amended agreement provides that following the closing of the proposed acquisition and in exchange for certain incentives and service obligations provided to ADT, Alarm.com will serve as the exclusive provider of services for ADTs professionally installed residential interactive security, automation and video offerings for a period of up to five years.
The agreement is subject to Alarm.com achieving certain performance conditions and allows for certain exclusions. This agreement is an important component of our Icontrol acquisition strategy but also serves to provide a foundation for Alarm.com's overall longer-term service relationship with ADT.
What Else Does Alarm.com Own?
There’s much more under the hood at Alarm.com. In addition to its SHaaS platform and patents, the company has several other properties acquired over the past few years.
Launched in 2013, Qolsys is an up-and-coming security and home-automation manufacturer that competes with Nortek’s 2Gig, as well as similar systems from Honeywell, Interlogix and others. Out of the gate, Qolsys partnered with Alarm.com for interactive services.
In 2014, Alarm.com paid $3.5 million in cash to acquire 18.7% of Qolsys, according to Alarm.com’s pre-IPO S1 filing. Later that year, Tyco acquired a chunk of Qolsys stock, reducing Alarm.com’s ownership to 8.6%. Tyco owns the DSC brand of security products and now uses Qolsys touchscreen-based panels for its higher-end offerings.
Alarm.com owns Five Interactive, LLC (dba Zendo), maker of IoT devices including multisensors, cameras, video doorbells, smart bulbs, thermostats, smart plugs and even its own Zendo Home cloud-based automation system.
More interestingly, though, Zendo is “Betting it all on HomeKit,” according to a July 2015 CNET article: “Most smart-home companies try to work for as many customers as possible, but startup Zendo is focusing entirely on developing products and an app for Apple’s new Siri-based HomeKit software platform.”
Zendo HomeKit-enabled home automation software
At CES 2016, Alarm.com introduced an Apple TV app for viewing surveillance cameras on the TV, but so far the company has been quiet on its HomeKit involvement.
In September 2016 Bhavan Suri, an analyst with William Blair & Co., said that Alarm.com shares had been “under pressure partly on account of Apple Inc.’s HomeKit announcement,” according to a report on Benziga.com:
Apple’s update on HomeKit included the inclusion of a new HomeKit app in the iOS 10 update. Since HomeKit can be used for both home automation and security, this has led to investor concern surrounding the negative impact on Alarm.com, analyst Suri mentioned.
“We are not overly concerned,” Suri commenting, mentioning the following about HomeKit:
- Targets the DIY market
- Works only with HomeKit and iOS devices
- Has no backend for security dealers
- Lacks cellular connectivity, making it less secure
The analyst pointed out that Alarm.com was a HomeKit partner and that HomeKit had been originally announced a couple of years back and received little traction since. He added that Alarm.com’s stock was trading at an attractive valuation.
Zendo principal Gary Bart was named VP of Alarm.com’s “Design Studio” in March 2016.
Alarm.com acquired Building36 a few years ago, ostensibly to get into the DIY business, but we haven’t seen a direct-to-consumer product … yet. In addition to offering user-friendly configuration and control software, Building 36 produces hardware like thermostats and water sensors for Alarm.com.
WH Interactive, dba BeClose, was a promising player in aging-in-place technology, using its own PERS (personal emergency reporting system) hardware, along with Alarm.com on the back-end. Alarm.com, a strategic investor at the time, took over BeClose in 2015 and now offers the products and services under the Alarm.com Wellness brand.
Alarm.com so far has not promoted this service in a meaningful way.
Like BeClose, PointCentral is an Alarm.com subsidiary that uses the Alarm.com back-end for a specific market segment – in this case vacation rentals. The company makes smart-home solutions – namely smart thermostats and access controls – for occupants as well as property managers.
In May 2016, the company reported (pdf) that its system is in use by at least 100 vacation-rental companies.
As with BeClose, Alarm.com has not promoted this platform in a meaningful way.
If the energy utilities really get serious about demand response, EnergyHub is poised to be one of the go-to technology providers. The company, acquired by Alarm.com in 2013, “helps utilities take advantage of customer-installed devices to rapidly launch and scale a load control program.”
EnergyHub allows utilities and their customers to “bring your own thermostat,” so demand-side-management isn’t limited to select thermostats.
The service currently works with a number of HVAC controls from Honeywell, Carrier, Nest, Vivint, Radio Thermostat of America, Ecobee, Thinkeco, Lux Products and Sensi.
According to the company, “Dozens of utilities rely on EnergyHub to deliver critical demand response services.”
The Rest of the SHaaS Landscape
If the acquisition falls through, Icontrol could be hurting. The big cable and telecom companies are building out their own SHaaS platforms, and Icontrol has failed to broaden its customer base beyond its few very-large custo
Icontrol One, an initiative that was supposed to compete with Alarm.com with an offering for independent dealers, was kiboshed; its “big win” with the giant Monitronics dealer network never materialized, per documents in the Applied Capital lawsuit.
Icontrol’s Piper DIY product, acquired in 2014, faces stiff competition these days. Some very rough math suggests the number of U.S. Piper users is about 30,000. (The 2016 Applied Capital lawsuit mentions there are 190 Icontrol users in New Mexico which, extrapolated, amounts to about 30,000 users nationwide.)
Following the announcement of the proposed acquisition last year, we posed the question: Who Will be the Next Icontrol?
Most of the assessments in that piece still hold true, but here are a few developments heading into the new year.
Honeywell’s home-grown Total Connect is still the closest thing we have to Alarm.com and Icontrol today, but it only works with Honeywell’s own security and home automation gear, which limits its potential. Honeywell does not report subscriber numbers for the interactive service, but industry followers suggest more than 1 million accounts.
Napco (Nasdaq: NSSC) is the most interesting prospect in the new SHaaS landscape. The security company launched its own SHaaS platform a few years ago called iBridge. Until this year, the service only worked with Napco gear, but now the company offers a generic Z-Wave/Wi-Fi/cellular gateway called StarLink Connect that works with Honeywell and DSC panels.
Read it again: Who Will be the Next Icontrol?
In the third quarter ended Sept. 30, 2016, Napco reported record-breaking revenues for the sixth consecutive quarter, driven by a whopping 65-percent increase in subscription-based interactive services. While the increase was not entirely attributable to iBridge (commercial fire and intrusion services played a role), the residential service and the new StarLink Bridge certainly played a key role.
Napco does not disclose subscriber numbers, but CEO Richard Soloway said in the most recent earnings call that the company expects to end the year with $6.8 million in recurring revenue, ramping up to $10 million within two years. Those figures pale in comparison to Alarm.com’s recurring revenue of more than $100 million per year.
MiOS, the little engine that could, continues to make baby steps in the SHaaS business. This year, Nortek acquired 25% of the company, which has powered high-volume solutions from BeHome247 (vacation rentals), Orange (European telecom), Nannotech (eldercare), ECHO Labs (energy management) and others, including MiOS’s own Vera home-automation system.
The most interesting new development with MiOS this year is a partnership with Intel, Amazon and other smart-home providers culminating in the Tiny Smart Home powered by MiOS. It will be on display at CES 2017.
Zonoff continues to be the one to watch. Its first significant win – Staples Connect – dissolved this year, but Zonoff continues to score customers around the globe. Most notably, the company is powering a new home-automation solution from Connected World Services (a division of Dixons Carphone) in the UK.
CWS is using Zonoff to remotely monitor and manage connected homes, offering expertise or dispatching service providers as needed.
Zonoff also is (was?) powering a new DIY security/automation system from LG (powered by ADT) if it ever makes it to market.
Greenwave Systems could be the one to watch in 2017. The company, which raised $60 million in Series C funding earlier this year ($90 million in total), provides the AXON platform that powers Verizon FiOS’s Quantum routers with Z-Wave and ZigBee connectivity. So far, Verizon has not exposed those home-automation technologies to consumers.
Greenwave also powers the energy-management service E.ON Touch, deployed by Europe’s giant utility provider E.ON.
In September 2016, Greenwave acquired Predixion Software, an IoT data-analytics company:
Adding Predixion’s RIOT product, a fully self-contained edge analytics engine, to the AXON software suite, provides customers with an unprecedented opportunity to capture, analyze and act on real-time data insights. By embedding advanced analytics capabilities, AXON delivers a more intelligent IoT experience to customers and delivers deeper insights into network management and performance.
Greenwave says AXON currently is deployed in 8 million households and 4 million mobile devices worldwide. The company expects revenues to reach $100 million in 2017.
Apple HomeKit, Amazon (Alexa, AWS), Google (Home, Cloud) and IFTTT emerged this year as real threats to the SHaaS establishment, although they lack the finesse of Icontrol and Alarm.com when it comes to integrating with professionally monitored security systems.
Alarm.com and Icontrol should be grateful for these emerging competitors. They could very well clear the path for a merger between the two greats.
Otherwise, little has changed with the status of the other 20ish competitors mentioned in the “Next Icontrol” article from June 2016, like SecureNet, Connect One, Wink and SmartThings.