Why Ring needed to sell and why Amazon bought it

The home security industry is always a growing market. Lots of consumers are seeking the services of companies like cctvburglaralarmsmanchester.co.uk to keep their home protected. And now with more and more crimes like parcel theft occurring, Amazon looks to capitalize on the market. Amazon plans to buy Ring, the maker of a connected doorbell and security system, in a deal that Reuters says is valued at $1 billion. The move is another expansion into home security hardware by Amazon, and a necessary exit for Ring after almost six years making consumer hardware and raising almost $210 million. With the development of home security, some homeowners are always looking for new ways to protect their homes, even going as far as to look at locksmiths similar to J & L Pacific Lock And Key Medford Oregon who would be able to help them set up security systems for their homes.

It also heralds the end of the IoT consumer hardware startup explosion that occurred between 2012 and culminated after Google purchased Nest for $3.2 billion 2014. From that peak, we entered a gradual winnowing of consumer device startups with the sale of Revolv, Pebble, and August. Those that sold were lucky. Untold crowdfunded startups failed to deliver such as Goji and Sense. And in the last six months we’ve seen the demise and formal shut down of products from Emberlight, Juicero, Staples Connect and Otto.

Last year a source in the industry told me that pretty much every company in the consumer IoT space was for sale. The challenge in figuring out which ones to buy boiled down to their technical specs or their success so far in the consumer market. With the Ring buy coming so soon after Amazon purchased Blink, which also has a connected camera and doorbell, Amazon has doubled down on home security, buying a technical advantage in Blink and a market advantage in Ring.

In December, when Amazon purchased Blink, I pointed out that Blink’s heritage as a low power video processor startup was the real value for Amazon. As I wrote then:

Amazon now has the cameras and future doorbell. It also now has its own image processing chip technology. As companies like Google and Apple build dedicated silicon for their mass-market devices, that could become an advantage. Even if it doesn’t Amazon now has another advantage in the smart home — a security offering.

Security is the gateway drug for the smart home. While many companies started out with fancy automated light bulbs or platforms like SmartThings, the consistent value and real short-term opportunity in the connected home is around security. Roughly a fifth of American homes subscribe to a commercial security product, according to industry figures. But IP cameras and sensors tied to smartphones are changing the economics of monitored security.

In that model, companies such as ADT or Alarm.com charge a monthly fee for keeping an eye on hardware they’ve installed. The hardware costs are paid out over time as part of the contract. But for an amount that can range between $100 for Korner to $500 from Nest, a consumer can get a basic security setup they can monitor on their own. ADT, Vivint and Alarm.com see the threat. They’ve invested in bringing hot connected devices into their own platforms and changing up their pricing models. ADT now offers a DIY security product created with SmartThings you can purchase in Best Buy.

The security giants aren’t alone in seeing an opportunity. Comcast now has 1.1 million Xfinity Home customers that get security and home automation features with their broadband. Nest has teamed up with an outside company to provide monitoring for its Nest security system if a users wants it. Increasingly if you want to play in the smart home, you start with or add security.

So it’s no surprise that Amazon, recognizing the potential of the smart home with Alexa, has decided to make sure it has all of its bases covered. Alexa can be the brains on the inside with Ring as the eyes on the outside. Plus, even my friends who know nothing about tech know about Ring. While the tech nerds of the world embrace Alexa, mainstream America has embraced Ring.

Ring will also undoubtedly help Amazon improve its Key program that gives Amazon delivery folks access to the user’s home. Amazon is expected to let Ring operate as its own business much like it does with Audible and Zappos, according to a source briefed on the deal. This makes sense as Amazon could otherwise alienate some of it’s existing Alexa partners who compete with Ring.

That’s why Amazon bought Ring, but why would Ring, a company that was raising money at almost a billion dollar valuation earlier this year sell?

It has to. It faces lawsuits from ADT that have prevented it from selling its newly-created home security system and a patent suit from a rival video doorbell company. But primarily, the economics of building and supporting connected devices is punishing. Last April, the maker of several connected consumer devices sat down with me to do the math. For every $200 device he sold, he faced roughly $3 in annual costs associated with that product. If he sells 10 million of them, he’s suddenly looking at $30 million annually in cloud, software, and security update costs. Those costs exist as long as the device does, eroding any profits made on the product.

Subscription feeds can offset these costs, but not every buyer will take up a subscription. Without knowing what percent of Ring’s customers are paying subscribers, it’s hard to know how profitable the company was and could remain for the long run. If it planned to go public, investors would certainly ask these questions. These are the same questions people should be asking as Netgear tries to sell of a 20 percent stake in its Arlo camera business through an initial public offering.

So far, Fitbit and GoPro have not provided a stellar example for consumer hardware companies. So between the reckoning happening on the startup side and the potential of an IPO, it’s no wonder Amazon’s offer looked like the best option. Frankly, Ring is getting off easy.