Just one more step in their plan to control the "Internet of things" for all devices in your home as well. Seems like a good match to go with Nest and like your article says, the addition of some home access control utilities could give them a real foot in the door for the home automation and security market.
Google Acquires Dropcam For $555 Million
Google, via its Nest Labs subsidiary, has acquired home security specialist Dropcam for $555 million USD.
IPVM estimates Dropcam's 2014 revenue to be on pace for $30 to $60 million USD. Industry sources cite a few hundred thousand cameras sold annually. At ~$100 average selling price (factoring in channel discounts), that would be in the low tens of millions. Include recurring revenue, that Dropcam claims 40% pay for, and that adds another low tens of millions.
Relative to other home oriented camera companies or surveillance manufacturers, the valuation is extraordinary. For example, Lorex, a common brand available at big box retailers, had revenue of ~$75 million when they sold to FLIR in 2012 for just $59 million. Additionally, leading VMS developer Milestone was acquired by Canon for (reportedly) less than 3x their revenue of ~$72 million USD.
However, 10x revenue multiples are fairly common for Silicon Valley acquisitions. Indeed, Nest, the subsidiary of Google who acquired Dropcam was itself acquired for ~10x revenue (estimated ~$300 million, acquisition price $3.2 billion).
Dropcam has touted its hypergrowth frequently. If the company is still growing at integer multiples, it would be a little surprising that they sold now considering in the Valley today, billion dollar valuations and acquisitions are increasingly expected.
Dropcam's Market Share
Dropcam's market share of IP cameras by units is likely ~2%, given the roughly 10 million IP cameras shipping annually. Dropcam only targets and is competitive in a very narrow segment of the overall IP camera. Of course, by revenue, Dropcam's market share is far less than 1% as the average IP camera sold costs 3 to 4x higher than Dropcam's.
By contrast, in the home market, Dropcam's share is far higher, though that is skewed because the home market is heavily analog, and a comprehensive picture would require factoring in those cameras as well.
Nonetheless, where Dropcam had a dominating lead was in the mindshare of the tech community, where it was clearly the camera of choice for Silicon Valley and its publications.
Dropcam's Product Positioning
Dropcam's strongest competitive advantage on the product side was ease of setup / use. Though this is slowly changing, most IP camera's remote viewing require manual setup including technical steps complicated / beyond the comprehension of the average consumer.
Otherwise, Dropcam's technology and product portfolio was relatively simplistic, with only one form factor (cube), limited maximum streaming resolution (720p) and no outdoor option. By contrast, even mid tier IP camera companies routinely offer domes, bullets, panoramics, PTZs and resolution options including 1080p, 3MP, 5MP and more.
Google Scared of Bad Publicity?
In all the publicity around the acquisition, the Google brand has been conspicuously absent. When rumors of this deal first emerged, many criticized the privacy implications of Google essentially getting a video feed into homes.
We suspect this played a role both in the positioning and the timing of the announcement (Friday end of business) to minimize the immediate backlash.
Future of Dropcam?
Google is clearly targeting the home market, starting with Nest and their thermostat, flaky fire detector and now Dropcam's cameras. However, the effort is still in its infancy with Google having little track record or history of selling hardware successfully at large scale.
The most optimistic scenario is that Google / Nest / Dropcam builds their own a complete suite of home services, including intrusion / alarm monitoring, using their scale to drive a large percentage of the market from incumbents.
On the other hand, the home experiment could fail or Google could lose focus / interest in it, given its core advertising businesses.
IP Camera Industry Impacts
How this impacts other IP camera providers depends on how Nest shifts Dropcam's marketing strategy. Dropcam has been spending on marketing at incredible rates and with expert precision compared to the lackadaisical efforts of traditional surveillance providers. Undoubtedly, this advantage has been critical to Dropcam's fast growth.
IP cameras benefit from little network effects so it is unlikely that anyone, including Google, can become a dominant player in the space. However, it still depends how well the slower moving incumbents and less well funded startups respond to the opportunity of Dropcam being assimilated into Google.
Dropcam Test Results
For our unique in-depth testing of Dropcam, see:
Does this mean the NSA can now watch me at home via my Dropcam?
John, I would be interested in your take on how, if at all, this effects the viability of VSaaS? I understand the issues involving bandwidth and storage in the United States but this acquisition seems to be a validation of the model albeit for home and pet use.
Peter, great question.
This is certainly a 'win' for VSaaS, a market that has long overall struggled.
However, overall it's more of a win for the Silicon Valley startup cycle and less representative of the fate / chances of other VSaaS participants.
The funding they got (~$50 million), the connected investors they had (KP, Melo, Accel), and their ability to generate buzz / press within Silicon Valley is not something other VSaaS startups can really hope to achieve.
On the plus side, Dropcam did reinforce a few key drivers for VSaaS:
- An integrated solution like Dropcam is easier to sell / scale than the Axis AVHS N tier channel / partner scheme.
- Making set up easy is critical (no port forwarding, holes in firewalls, etc. needed)
- As a consumer play, you need to spend lot of money to market and can not simply rely on people to find you on the Internet.
Two other things on the down side:
Dropcam's video quality was relatively poor (for professional surveillance) limiting their video to 200kb/s streams, likely to reduce bandwidth/storage costs.
Lastly, but quite important, most people buying Dropcam do not pay for the VSaaS / hosted part. They just buy the hardware and get free live access.
One aspect I am curious about:
Dropcam is a huge AWS/Amazon Web Service (Hosting) customer and apparently has invested heavily integrating to the service.
Does Google's purchase mean this is changing? In the short term, I'm sure the answer is no, but in the long term does Google/Nest really want to buy a core service from a hosting competitor?
I presume they'll switch but I don't think it will make any fundamental shift in their overall competitive positioning.
The trajectory looks like Google is moving towards complete home automation. This of course has been attempted before, but the environment is dramtically different. Technology has miniturized, commoditized and hugely advanced. I am going to predict that within five years, home video survelance will be one of many features in a home system, rather than a standalone product.
Turning a product into a feature is one of the most disruptive changes we have witnessed in the past decade. Prime example is the complete collapse of the pocket camera market. Low end cameras are just one of many features that you get on your phone.
This is going to crush the existing market structures for home survelance.
Adapt or die.
Has there been any thought to doing a 5 year (or even 10 year) annalysis of acquisitions in the industry to break down valuations and trends?
Thomas, good suggestion. I'll queue this. It's really only been in the last year that acquisitions have 'heated' up. Before that, it was only one every once in a while.
From what we saw at ISC West 2014, how do you think this will impact Dropcam's initiative to create an installer channel and look for new distributors? Do you think they will continue on this route, or drop it after the acquisition?
Would be interesting to see them at ASIS 2014 in Atlanta.
Derek, the ISC West trip was more of a fishing expedition. Now that they have been acquired, I suspect a traditional integrator / dealer channel would become a lower priority.
Dropcam has officially announced the merger to their members. They sent an email with the following:
Included was a link to Dropcam's FAQ containing information about the move. Based off the FAQ, no new changes have occurred yet, and Dropcam's 1 year warranty still applies.
Moreover, there is a distinct absence of any mention of Google in the announcement...