Home Security Cameras Capture Corporate Events
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There are two types of fairy tales. There are the Disney-fied versions where everyone (except for some wicked witch or vile tyrant) lives happily ever after. Then there are the Grimm Brothers-type tales that can be as gruesome as any Halloween night movie marathon. The lesson is often that the good guys don’t finish first. Take the well-known fable about the Chinese Zodiac in which creatures great and small compete to be one of 12 animals to be included in the Zodiac. Long story short, the Rat cheats and becomes the first to cross the finish line, becoming the primary animal in the Zodiac. Now we have a new tale to tell, about the frog that swallowed the canary in an effort to build the best home security camera company in the world – and the spin-off that hopes to spoil the fairy book ending.
Just this week we learned that Smartfrog, an Internet of Things (IoT) startup out of Ireland, invested $25 million into Canary, a New York-based startup also in the IoT consumer segment. The investment actually represents a merger between the two companies, both of which have developed their own home security camera systems, with aspirations to push deeper into the IoT ecosystem. Smartfrog will take the lead with its controlling interest, putting its current CEO, an experienced telecommunications executive from Switzerland named Charles Fraenkl, at the top of both companies.
IoT Mergers, Acquisitions and Competition
In the big picture, the apparent merger is relatively small potatoes, based on the estimated $1.1 billion in transactions spent on IoT mergers and acquisitions for the first half of the year, according to IoT Agenda. Though we find their definition as to what qualifies as IoT to be fairly broad. For example, it says a nearly $250 million investment takeover of a Scottish infrastructure provider for telecommunications by a London-based private equity company somehow counts as an IoT M&A. We recently wrote about the coming of 5G communications and the profound impact it will have on other technology sectors such as IoT, in particular, so there is a valid link between the two. But the merger is far from being a pure-play M&A.
The impetus behind the Smartfrog and Canary merger is probably one about survival, given that their biggest competition comes from huge companies like Nest (owned by Google), Ring (owned by Amazon and Arlo (ARLO), which spun off from Netgear (NTGR) just a few months ago. (More about them below.) And that doesn’t include all of the other smart home security startups out there. The argument for the partnership is that Canary and Smartfrog bring complementary technologies and business models to the table. While Smartfrog has focused mainly on Europe, Canary built a market in the United States. Smartfrog follows a pure SaaS (Software as a Service) offering with more than 90 percent direct sales, whereas Canary offers its products mainly in retail, with more than 10,000 point of sales, and almost half of customers buying a service-based subscription.
Let’s take a closer look at both companies.
Canary in the Data Mine
We introduced you to Canary last year in our roundup of 10 home security startups. Founded in 2012, the startup has raised about $66 million in disclosed funding, including the most recent $25 million investment from Smartfrog. Other investors include top VC firm Khosla Ventures, which participated in two previous rounds, and led a $10 million Series A in 2014. Canary offers various HD security cameras at different price points and with different subscription packages that offer various perks over free membership.
The All-in-One, as the name implies, does it all and includes a smart 1080p HD camera, 90-decibel siren, plus a built-in climate monitor. The “smart” part comes into play as Canary learns to understand normal versus unusual activity in the home (ie., vanilla sex versus leather and chains sex), as well as knowing when a person is present or not, using machine learning to get smarter. The thing even monitors air quality, temperature, and humidity. It’s Alexa and Google assistant friendly as well.
What a difference 18 months can make in the tech consumer world. In March 2017, the starter pack (two cameras) retailed for $369 and did not include any sort of membership (that was separate at $9.99 per month). You can get the same package today for $268 with a one-year membership, which includes 30 days of video storage and a few other perks. Or, you can opt for the Canary All-in-One + 3 Months Membership which is currently on sale for $134.99 on Amazon.
Smarter Than the Average Frog
On the surface, one would think the merger would be headed the other direction, with Canary as the dom in this new relationship. Founded in 2014, Smartfrog has picked up $32 million in disclosed funding, all of it between 2015 and 2016. The company claims to have users in 185 countries out of about 195 in the world, though currently only its free app and paid digital services are available worldwide. The service can also be used with a Smartfrog hardware device which is shipped to five nations in Europe.
The Smartfrog camera seems to come with the usual bells and whistles of many smart home security camera systems, including motion detection, night vision, and two-way communication for scolding the dog while it chews on your socks. One thing that does make Smartfrog’s platform stand out is that you can turn other devices such as old smartphones or even camera-enabled laptops into surveillance cameras using the company’s free app. The premium ad-free version offers HD-quality recordings and 30 days of event history beginning at $3.99 per month. Otherwise, the surveillance bundle starts at about $6.35 per month, which includes one Smartfrog camera, and can be cancelled at any time.
A Pure-Play Home Security Camera IoT Stock
There’s been no word on the combined value of the new company, though it appears they will remain separate entities for now. The smart home security camera market is certainly a crowded one, especially after Netgear took the bold step and spun off its smart surveillance division known as Arlo in August. Let’s wrap up this article and look at this newly created public company that offers investors a rare pure-play in the IoT market, specifically in the smart home category, now that we’ve covered some of the recent activity in the private market.
Arlo Technologies quietly sold its first products back in 2014, and as of the first quarter of this year it claims to have shipped about 7.5 million devices. Its product line includes a number of cameras (including a mobile version that requires a cellular plan), baby monitor (complete with bunny ears), lights and doorbells. Netgear was no doubt encouraged by strong revenue growth, with its Arlo division doubling revenue from 2016 to 2017 to $378 million. It’s not as if Netgear has completely cut ties with its former division. In fact, Netgear currently holds more than 80 percent ownership in Arlo. While that percentage is expected to drop over time, as Netgear plans to distribute its shares of Arlo to its stockholders as a tax-free distribution, the networking hardware company is expected to keep a controlling interest.
Arlo just reported its quarterly results for the first time trading on the New York Stock Exchange – and it didn’t go well. It reported a record $131.2 million in revenue for the third quarter, which represented growth of about 25 percent over last year. However, it ended the third quarter in the red with a loss of $13.2 million. The stock has been on a volatile roller coaster ride, debuting at $16 a share on Aug. 2, after being valued at about $1.2 billion. Today, it has a market cap just above $1 billion and is trading at $14.50, after swinging between $11.61 and $23.77 in less than three months.
The company claims 40 percent market share by point of sale dollars in the U.S. consumer network connected camera systems market, according to a pretty reliable market research company called the NPD Group. That seems pretty impressive given the competition from Google, Amazon and others. On the interesting tech side of things, it offers a monthly subscription for its AI-powered services that includes not only person detection, but package detection, vehicle detection, animal detection and bullisht detection.
Conclusion
The smart home security camera market offers some interesting and accessible insights for retail investors. It’s one of the few emerging technologies that many of us have directly experienced and used, so it’s easier to understand the products and business model. We see that there are a lot of competitors in the market, offering similar products with similar bells and whistles. And we know there are many small-time players up against behemoths like Google and Amazon. That all creates an intense pressure to innovate at the lowest prices possible to beat the competition. That’s good for consumers but creates a difficult environment for investors, as illustrated by the volatility of Arlo Technology’s stock. As far as the Canary-Smartfrog story, it’s still a fairy tale with no clear ending.
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