In 2013, a guy who was trying to pitch a company, called DoorBot, that sold security doorbells, went nowhere on Shark Tank, as the sharks rejected his offer. The founder Jamie Siminoff positioned the idea at $7M. Here is the video.
Last year, the company was valued at $460M.
Last week, the company, now called Ring, was acquired by Amazon for $1B.
This is not a post to castigate the poor assessments of Ring’s original business idea: As ideas evolve they get better, and some cosmic confluence of interests can be helpful for a firm.
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Ring, at one Billion USD, is a tremendously expensive acquisition for Amazon. In fact, Ring is Amazon’s second-biggest acquisition, after Whole Foods. Similar large acquisitions such as Kiva (Warehousing Robots), Goodreads (Reading Social network), and Zappos (shoes) are the closest in terms of valuation.
So Why Ring?
In my very first analysis of Amazon Key on the blog, I noted the issue Amazon Key solves, while noting a pitfall.
- Amazon Key eliminates a big supply-demand mismatch problem, of scheduling exact deliveries.
- Amazon Key needs to fix the potential sources of service failures in delivery.
Specifically, I wrote:
Currently, Amazon Key is not integrated (see FAQs) with existent Security alarm systems. If you (as a customer) have a security alarm system installed in your house, then on delivery days you have to disable the security alarm system. It is very possible that such a requirement may violate some precepts of contract with your home insurance company. If a rogue delivery ignores your camera and causes damage,…
This, patently, was the “trust-in-service” problem that Amazon had to solve.
Ring Solves it for Amazon. Customers using Amazon Key, do not have to actually disable the alarm anymore. This feature is going to improve the number of customers considering Amazon Key.
In October 2017, Ring introduced Ring Protect with a base unit and an alarm security service at $100/year (much cheaper than a variety of services offered by ADT and other security firms who haven’t innovated sufficiently). In fact, Ring’s security system quite basic.
[Ring’s] security system and sensors will work together with Ring’s existing cameras to monitor your house, and they’ll all be accessible through a single Ring app.
However, it solves Amazon’s “trust-in-service” problem immediately, as security-alarms do not have to be disabled on delivery days. Instead, Ring works as an alarm monitoring system better than the current cloud cams.
Big Play for Home Security
It just turned out to be fortuitous for Ring that Amazon started focusing “in-house” deliveries, which made Ring a perfect solution. Amazon’s “in-house” delivery plan has been making in the while, so Ring has been on their radar for a while. Amazon Alexa Fund is a Series C investor in Ring.
Is Ring worth $1B to Amazon?
I suppose, but it is hard to answer that. My view is that Ring facilitates a competitive entry by Amazon into the sterile security market, which has all the characteristics of being upended by Amazon.1
- Security systems are subscriptions with high lock-in but poor loyalty: Contrast that with Amazon Prime.
- Security systems are high price, high margin, low tech: Perfect for Amazon to compete heavily on prices by continuing their low margin, scale advantage of Amazon Prime.
Security services should be alarmed.
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Notes:
1. In this regard, Ring is comparable to Whole Foods acquisitions, which expands Amazon into a market or channel which has huge costs of execution. Many Prime customers are likely customers in higher socio-economic strata, who shop at Whole Foods customers, and also have security systems at home, but have never used Amazon for organic food shopping or for security systems. (Contrast this with acquisitions like Zappos and Goodreads that are “category enhancements”).