RETROFIT: Is it Right for You?

June 29, 2010

Comcast wants to destroy your business—or what’s left of it. Oh, and so does security giant ADT, Intel, Cisco and some other heavyweights.

That’s the message being delivered by Rob Gerhardt, industry veteran and one of the founding fathers of CEDIA (Custom Electronic Design & Installation Association). Gerhardt has been traveling the country and delivering two-day “Remodel Your Business” seminars, sponsored by lighting control company Lutron.

In a February session outside of Boston, Gerhardt greets each of the dozen or so attendees warmly. Then, over the course of the next few hours, he tells you that your business is worthless. That no one would buy it. That it’s as good as dead.

“You’re seeing an industry that never really was an industry—and it has run its course,” says Gerhardt, two-time installation company owner, salesman, and former CEDIA president.

He points to beleaguered new construction market. “It will recover, but not to 2007 levels.” He points to increasing commoditization, and not just of TVs and video displays. “The rich will always be uber-rich, but they don’t represent a future for you.” And, he adds, you don’t want to be one of the many chasing the only millionaire home theater project in town.

Finally, he points to the problems with the contract bidding process.

“Contracting/bidding is not selling,” Gerhardt asserts. “A long-duration project is a financial treadmill, because you need more projects to fund the older ones. And that destroys your exit strategy.”

Wait, I need an exit strategy?

Yes, Gerhardt says. You need to exit from A/V, because it is killing you. The margins are down, new construction is down, and spending is down overall from years past. The economy may be on a slow growth trajectory, but is your business? Really?

Enter Comcast, ADT and others. Last year the companies bought major stakes in a control software company called iControl. You may have heard of it. iControl’s ConnectedLife system provides an interface for home security, energy management and at some point digital home health technologies—for any web-enabled device, including iPhones and BlackBerries.

What’s the significance?

iControl, basically, is an inexpensive home control system. Connect a few wireless light modules to it, and you have a basic lighting control system. It can interface with a security system and thermostats. It can monitor electricity and act as an energy monitor. And it doesn’t cost an arm and a leg.

ADT has started test-marketing iControl systems under its brand name, in South Florida. Three levels of service are being offered in Florida, starting at $699 and with a $47 monthly monitoring charge. That’s right: recurring revenue. Lots and lots of it.

ADT’s most basic package consists of two security contacts, a security panel and the iControl software to access it from a computer or web-enabled phone. Next up was two security contacts, two lamp modules for wireless lighting control, a thermostat and the iControl software, now controlling your energy use from afar. And the best package consisted of two contacts, two lamp modules, thermostat, two security cameras and a touchscreen.

According to ADT spokesman Bob Tucker, the buyers ADT has had in South Florida are adding on cameras. The systems in South Florida were being sold via leads and appointments. But ADT intends to sell iControl systems through all its channels: via Internet, phone, dealer network, the works.

Next month the company plans to expend to test markets in Portland and Houston, and a national rollout is slated for August.

“Companies like iControl are creating intelligent networking solutions that are secretly hidden in the alarm panel, with ADT as their partner, so once that panel goes into the house it’s the Trojan horse that takes over the control of the house,” says Rich Green, CEDIA Board of Directors member, futurist and owner of high-end electronics design firm Rich Green Ink. “And the CableLabs spec for home controls is baked into the cable set top box: Another Trojan horse. The cable guy brings that box into the house, plugs it in and it becomes the nexus of home controls. That specification includes thermostat and appliance control—from the cable box.”

Comcast is also expected to roll out iControl-based services later this year. Will Comcast actually try to do security? (See sidebar.) Regardless, the cable giant could do a lot with an iControl system in the home.

Comcast expects to sell 5,000 iControl systems a day for 1,000 days, Gerhardt says. And with that, he says Comcast believes it will generate its own installation force, which could install other systems, like A/V and energy monitoring equipment and more and more home control.

The effect of this is what Green terms disintermediation: the elimination of the middle man.

“It’s a massive disintermediation of our channel, using the existing pathways into the home. So what are those pathways into the home? It’s the security guy, is it the cable guy, the telephone guy, it’s the CEDIA guy, it’s the electrician. So the big companies that got venture-funded, like iControl, are looking at those pathways into the home, and saying how can we get past the integrator channel, because they’re great guys but they’re a bottleneck. There aren’t enough of them to reach the retrofit mass market. So you see iControl using the security pathway. You see the cable boxes’ pathway.” (Read the complete interview.)

Still not afraid? “The service provider industry is looking for the next big revenue generator,” says Greg Roberts, vice president of marketing for iControl. “Our core vision is to provide our deployment partners the opportunity to provide services to remote customers,” so they can control their home systems from anywhere.

“The beauty of our business model is that we can do business with companies that have millions of customers that they already have relationships with,” says Roberts.  “A broadband home management platform really is best suited for deployment with companies that have a lot of relationships with customers.

“The service provider industry already has customer care resources and truck rolls to the customers. They have the ability to offer a better solution that is in the marketplace today.”

When asked if iControl was looking at a market of 50 million to 60 million homes, as had been reported, Roberts said, “With so many large tier-one service providers planning to or investigating a broadband home management solution, the numbers can be much higher than that.”

The cruel irony of iControl is that one of its founders, Chris Stevens, was one of the founders of CEDIA and one of the organization’s early presidents. How times change.

“Disintermediation means they want you gone,” Green warns. “You’re the intermediary. You’re the person who takes a box from a wholesaler and sells it to an end user. They want you gone.”

The question, Green asks, is “What are you going to do about it?”

Gerhardt’s Plan

Rob Gerhardt’s two-day courses aren’t all doom and gloom. He says there’s a way to save your business—and even thrive.

Only … ahem … you’ve got to get out of A/V, he says.

Gerhardt doesn’t advocate ditching your audio or home theater business right now, though he does recommend taking about two years to wind it down and to begin focusing more on retrofit opportunities, as ADT and Comcast are.

“The next five years are not going to be anything like the last five years,” echoes CEDIA’s Green. He, too, points to commoditization and the oncoming iControl onslaught. “We need to turn the business upside-down. That means going from a high-margin, low-volume business to a low-margin, high-volume business.

Like ADT and Comcast.

The iControl services from ADT and Comcast, “will launch a blitzkrieg of advertising, Gerhardt says. “The ad blitz will create an opportunity for you to draft in their slipstream.”

So now you’re supposed to compete with ADT and Comcast?

“They’re creating a desire for a service they cannot provide,” Gerhardt says. “The cable company has always been a monopoly, which doesn’t breed the entrepreneurial spirit.

[The iControl deployment] is not going to go as well as they think. And in the meantime, they’re going to piss off a lot of people. This is where you can kick their ass.

“You can offer personalized installations, professional in-home staff, complete packages with full service, home management that pays for itself through dimming and comfort and control and hibernation modes,” he adds.

In other words, you can do everything ADT and Comcast is planning to do—only better. And instead of focusing on selling audio/video, instead, you should be selling connectivity solutions, wireless, and green. Yes, green, Gerhardt says.

“Green is the biggest economic opportunity you will ever see. We are entering the green age of systems integration.” Custom electronics (CE Pros) can upsell potential ADT and Comcast clients soup-to-nuts energy-efficient lighting systems, better smart thermostats, better energy monitoring systems, and better control systems that can put a home in an energy-saving hibernation mode or cut power to devices that draw vampire power when they’re “off” or in standby.

But do you really have to give up A/V?

“If you can find it, keep it,” says Green. But don’t be too slow to see the long-term benefits of selling to the retrofit market and turning your business from high-margin, low-volume to low-margin, high-volume.

The bigger obstacle for many custom electronics businesses is the nature of the business.

“Custom is the enemy of profit,” Gerhardt declares. Remember the financial treadmill of the contract bid process he discusses? It can be an endless loop of non-profitability.

“And if you try to do both [custom and retrofit], it becomes schizophrenic,” Green says. “You can destroy both sides of your company. Because in high-margin, low-volume, it’s all about paying attention. The customers will pay almost any price for you to pay attention to them. That’s custom. In the low-margin, high-volume business, they just expect it to be done. So it’s about hitting a price point, and getting in and out quickly. So the overhead involved in creating a business designed to pay attention doesn’t scale [to retrofit].

The solution? Green says you could start a new division of your business, devoted to the retrofit market—though it would have to be run almost as an independent business. (Seriously, read the interview.)

Gerhardt advices honing your in-home sales skills first, then hiring in-home salespeople to work on commission only and training them—as you ease out of the construction/bid model.

Gerhardt goes so far as to say he once sold knife sets door-to-door—and demonstrated knives that could cut through Ginsu knives. The second day of his “Remodel Your Business” seminar teaches how to market and sell in the home. And at the end of the first day, he unveils his own Group Gerhardt Vizualizer portable sales demonstration platform, a rugged video monitor/touchscreen and computer, along with software programs that can compute ROI for selling energy-efficiency systems and generate sales proposals on-site.

“You have to hone your in-home sales skills, and close [a sale] in one visit,” he says.

But is the former knife salesman trying to make Ginsu knife salesman out of CE pros, and then selling them the Ginsu knives to do the job?

You wouldn’t necessarily be selling door-to-door. But you could sell $10,000 to $20,000 systems in upscale neighborhood, gated communities and the like. And Gerhardt says that instead of selling A/V systems, you’ll likely be selling dimming systems and home energy dashboards that outperform anything offered by ADT or Comcast.

“You should develop an energy management and monitoring policy that you can charge for,” Green says. “We used to give away labor to sell equipment. Now we need to give away equipment to sell labor.”

“Design, design, design,” Green advocates. “And charge for it, by the minute if you can.”

The Future is Now, Again

I can’t help but recall attending Rob Gerhardt’s CEDIA Expo courses in the mid-1990s. He talked about home automation, and installing expensive control systems for millionaires in Dallas, and how one guy accidentally got locked out of his home all night, on a balcony, because of how he wanted the automation system programmed. We all laughed. We laughed merrily, because clunky systems or not, we were stoked about the possibilities of home control and automation and the market we could enjoy. The future was finally now.

And there’s that story again. Gerhardt is good at telling it. A few of us chuckle. But this time, so many years later, the story feels different. There’s an air in the room. It’s one of pensiveness. Intense, heavy pensiveness.

Are the CE pros in attendance thinking whether they should buy Group Gerhardt’s tools of change? Maybe. But there was so much more to think about in that first day of “Remodel Your Business.” I know I was thinking about the future of those CE pros’ businesses, as well as the future of the custom electronics industry.

Were we not even an industry, as Gerhardt inferred? Were we just a big, happy home entertainment bubble? I don’t believe that, but I also can’t see the A/V market bouncing back to pre-2007 levels. You’d have to be a pretty good denier to think like that.

“Your biggest problem is not construction. It’s consumer attitudes,” Gerhardt says. “More people want connectivity than home theater and distributed audio systems.”

Gerhardt may be guilty of some hype. He is, after all, selling a solution. But the fact that a lot of audio/video integration companies are in serious trouble is not going to go away. And Gerhardt is no doubt right about more people wanting connectivity than A/V.

Whether Gerhardt is right about getting out of A/V, or if your can transition into more of a retrofit business, the bottom line is becoming increasingly clear: If you don’t look to get into the retrofit market, and in a meaningful way, you are leaving a lot of money on the table.

And as Green said, that doesn’t mean you necessarily have to stop selling A/V. But selling to both the custom and mass markets—even upscale mass market—are different ball games and require different business and marketing strategies, possibly even different arms or brands of your business.

There is also a little saying about the luxury market, which few luxury marketers will say aloud: Sell to the rich, live with masses; sell to the masses, live with the rich.


An iControl Market?

As the company behind ADT’s and an expected Comcast rollout of home control solutions, iControl says its platforms integrate remote home monitoring, home control, energy management into traditional home security to keep consumers connected to their homes wherever they are. ADT and Comcast are expected to rollout inexpensive iControl solutions to millions of homes.

We spoke with Greg Roberts, vice president of marketing, iControl.

Can you succeed at this, where other efforts have failed?

Remote home monitoring and home control has a lot of intriguing solutions and feature sets consumers are interested in, but home monitoring and home control alone does not provide enough for people, so we engineered our solution to integrate with home security, which adds more value.

Consumers clearly indicated, in all qualitative and quantitative research, that there needs to be more of a value than peace of mind. You have the comfort and convenience of security system, but we’re layering on functionalities that people are willing to pay for.

Home security is $9 billion a year industry, and we can literally double that market.

Will Comcast roll out similar services?

We haven’t announced anything with Comcast, but we see a number of different types of rollouts, and some with broadband service providers. [Comcast is an investor in iControl.]

Will a broadband provider try to sell iControl as a security system or as something else?

The initial deployments that we have now are of interactive broadband home security with enhanced functionality. What we’ll see in the home security and broadband service provider space is a launch of an interactive home security solution, followed by an energy management solution sometime in the future.

Come on, who’s going to trust Comcast with home security?

Our research shows an overwhelming response from consumers that want security from a broadband service provider. They feel their broadband provider or telco is credible enough to offer security, and they like the idea of having it bundled.

(Note: Roberts was unable to provide numbers or supporting documents on iControl’s market research.)

A version of this article also appears in this month’s issue of CE Pro.


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