For years, tech firms have argued that the era of the “smart home” is here. Hardware makers and internet companies have all stepped up efforts to try to grab a slice of this multi-billion-dollar market, going up against traditional white goods giants.

However, their efforts to gain market share have resulted in a fragmented market, in which multiple ecosystems exist that are incompatible with each other. Not only does this restrict their growth, but it also impacts users’ choices.

Smart homes are not like smartphones—it’s all about building ecosystems. To dominate the market, players need to aim for industry-wide standards and build a hub compatible with devices made by other players.

What it is a lot like is mobile phone operating systems, in which most applications are built around two monopolistic systems—Android and iOS. In the smart home sector, connected devices must be compatible with the hub so they can be controlled.

The bottom line: Companies are scrambling to gain a foothold in the smart home market. As an “ecosystem” category, players believe that hooking consumers up with discounted hubs will land them in a strategic position in the fast-expanding sector. But so far, the market is extremely fragmented—Xiaomi, the leading ecosystem, has only a 16% share.

  • Other major players, such as Baidu, Alibaba, and Midea, have released home hubs. While still outside the top five, Huawei also launched its HiLink smart home network platform in 2015.

The market: The smart home market volume in China was $11.6 billion in 2018 and will reach $32.9 billion by 2023, according to market data provider Statista.

  • Chinese firms shipped 36.7% more smart home devices in 2018 to hit an annual total of nearly 150 million. These include security cameras, smart speakers, smart light bulbs, and other connected home devices. Annual shipments could hit 500 million by 2023, according to market research firm IDC.
  • The biggest single player in the market is Xiaomi, with 16% of the market in the fourth quarter of 2018, followed by electrical appliance makers Haier and Midea with 11% and 9% of the market, respectively, the IDC report says.
  • Alibaba and Baidu round off the top five.
  • More than half of the market, however, is controlled by “other” companies, which includes many small appliance manufacturers and nameless hardware makers.
  • The market is scattered, meaning that there is no single player with the ability to set the industry-wide standards for smart homes or build a platform to connect devices from all brands.

Dropping in on Xiaomi: On Wednesday, TechNode paid a visit to a new smart home exhibition at Xiaomi’s Beijing headquarters, a 300-square-meter area decorated just like an Ikea-style show house.

Every device in the fancy show house is either produced by the company or by companies belonging to the so-called “Xiaomi ecosystem,” a set of startups that are invested, acquired, or in close cooperation with Xiaomi.

While most of the core devices, such as the smart speaker that controls the whole system, the smart television set in the center of the living room, and the smart lock that allows doors to be opened via fingerprint-scanning, are made and branded by Xiaomi, other devices are supplied by Xiaomi ecosystem players.

For example, the Xiaomi-invested Guangdong-based home appliance maker Viomi is responsible for the smart refrigerator on show. It comes with a huge screen to display the expiry date of the foods inside.

An automated curtain setup—of course, controlled via mobile phones and voice commands—attracted many onlookers, also  made by a Xiaomi backed firm. This time it was Shenzhen-based startup Aqara.

However, a Xiaomi spokeswoman told TechNode that its home hub is not limited to Xiaomi partners, adding that third-party hardware manufacturers can also build compatible products.

What’s included: A smart home system usually consists of a security system, lighting system, a home entertainment system, and most importantly, a smart home hub that monitors and controls all the connected devices from a single point.

  • The security system usually consists of devices such as security cameras, locks, and smoke detectors. Category sales in China reached 13.4 million units in 2018, accounting for 8.9% of the total smart home device shipments that year.
  • Sales of smart light bulbs, and other lighting devices grew nearly fivefold to 560,000 units last year.
  • Revenue from smart appliances, including connected refrigerators, air conditioners, and other gadgets such as smart curtain tracks, increased by over half to $3.4 billion in 2018, according to Statista.
  • Home entertainment systems—comprising connected televisions, projectors, and stereos—is one of the top-performing categories, contributed nearly 11% of total revenue in the sector last year.

The hub: Tech firms such as Xiaomi and Baidu tend to build their smart home systems around voice-controlled smart speakers.

  • China has become the largest smart speaker market in the world as sales in the second quarter nearly doubled to 12.6 million units, more than twice as much as in the US market, which shipped 6.1 million units during the same period, according to market research firm Canalys.
  • Baidu is the biggest smart speaker vendor in China with 4.5 million units sold in the quarter.
  • This is in sharp contrast to when it was rolled out in 2017. Only 1.65 million units were sold that year. Annual smart speaker shipments reached 20 million in 2018 in China, accounting for 13.3% of total annual smart home device shipments.
  • The surge in sales is partially due to a price war between China’s tech giants, including Alibaba, Baidu, and Xiaomi, which slashed average prices for the devices from around $100 in 2017 to under $20, meaning that they are likely sold at a loss.
  • The intention behind the strategy is to attract their smart speaker users to build their smart home systems around the device they have.

Conclusion: While every player in the market is trying to build the smart home hub to host their ecosystem, consumers will have to choose from the outset which brand they will be tied to. And they won’t like it because it could limit their ability to make their own choices.

  • The industry needs a centralized smart home platform to break the system lock-in approaches, and the platform should be made by a third-party organization, similar to how Google built the open-source Android OS in the early years before entering the smartphone market.

Writing about semiconductors and telecommunications.

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