Avoiding the smart device Ponzi scheme

When it comes to connected devices, cloud costs can be a kick in the pants. Surprise AWS bills from inexpert architecture, a sudden rise in customers storing video, or an inability to keep selling more hardware as the usage of a platform grows can all cause a hardware company to start bleeding red ink. And if the company doesn’t have a plan, it can lead to devices that shut down or having to beg customers for money in the form of subscriptions.

This happened recently to Wyze, maker of a line of low-cost smart home devices, said its co-founder and head of marketing, Dave Crosby, at my Level Up the Smart Home event this week. The company had signed a partnership with a startup to provide on-camera AI-based image detection and promised that the service would remain free. A few months into the partnership, however, Apple purchased the startup and notified Wyze that it couldn’t use its software.

Suddenly Wyze had no way to offer person detection without incurring cloud costs, which would seriously impact its bottom line. “This was one of the toughest moments of my career because we had promised people free person detection and then we had to take it away,” said Crosby. So it turned to its users with a mea culpa and asked them to pay what they wanted for person detection while also letting them know what a fair price would be.

Surprisingly, roughly half chose to pay, and many of those people paid the $1.48 that Wyze said they would need to pay to keep it operational. According to Crosby, even though half of the users aren’t paying anything, “As of now we are sustainable.”

As a bonus, Crosby also said we should anticipate Wyze being able to handle local person detection in a year or so.

This isn’t the first time Wyze got lucky. It was able to grow enough to become a large Amazon Web Services customer early on by selling new devices. That meant it was able to go back and renegotiate its cloud costs, which Crosby said yielded it a 15% discount.

Growth both helps and hurts makers of connected devices. Scott Harkins, the GM and VP of Connected Home at Resideo, shared some of the math. If he sells a million thermostats, each of which has 15 cents in recurring cloud costs each month, he’s paying $1.8 million a year in costs of goods sold for that device. The following year, if he sells another million, he’s paying $3.6 million a year. So he sold the same number of units as the first year, but now he’s paying double to support the units. Over time, supporting old devices eats into the margins associated with the new devices.

Many companies hope the growth of their new devices will be large enough to support the ongoing cost of supporting their existing ones, which creates a Ponzi scheme of sorts. They have to keep selling hardware just to cover the costs of the cloud.

Everyone on the panel said that subscriptions in the smart home were here to stay, in part because that’s what venture companies are funding and in part because otherwise they can’t afford to support a device over its life and pay the cloud costs. Hoping that your product scales to the point that sales support ongoing cloud costs until you can renegotiate or build some kind of sustainable model is a business plan that will likely lead to angry users and chagrined executives asking for subscriptions.

Other ways to cut cloud costs include doing as much as you can locally on the device and, of course, managing expenses. Harkins said Resideo started out with a cloud for each device, but has since shifted to one cloud for all of its devices to get the benefit of scale. He also said that companies should look at the testing environments, whose costs will be similar to those of the production cloud. “Make sure every engineer doesn’t have their own test environment and keep an eye on those costs,” he said. Crosby added that companies should also negotiate if they can.

Both Harkins and Crosby want to see cloud providers become more flexible with their contracts. Crosby wants shorter terms and more of a chance to renegotiate, while Harkins wants better service-level agreements for essential home services, such as security and leak detection.

If you’re building a connected device, go watch this panel. If you’re buying connected devices and want to understand why subscription services are everywhere, this panel will explain it all.