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: