Google + ADT and the Scale Advantages of Landlords

This week, Google announced a $450M investment into 145 year old home security company ADT.

From the announcement:

“Google will make a $450 million investment in ADT in exchange for shares… Upon the closing of Google’s equity investment in ADT, Google will own approximately 6.6 percent of ADT’s outstanding aggregate common equity. Google will combine its Nest devices, services and technology with ADT’s leadership position providing security solutions for millions of homes and small businesses in the U.S. The partnership pairs more than 20,000 ADT professionals together with Nest’s portfolio of helpful home devices. The company’s network of thousands of professional technicians will be able to sell and install devices like Nest Cameras and Nest Hub Max, all powered by Google Assistant.”

The infusion of capital, and formal relationship with Google, could indicate a changing of the guard for ADT, a company whose business model has historically been to subsidize monitoring hardware and installation in favor of the high-margin recurring revenue from monthly monitoring contracts. Products such as Google’s Nest suite and Amazon’s Ring offerings eventually came to market, and undercut the professional monitoring market with DIY solutions that triggered notifications at either a push of a doorbell or by computer vision rather than via active monitoring. Technology allowed notifications to homeowners of potential intruders or problems to be unbundled from a monthly subscription at a security level that was good enough to fit their needs. It worked: Ring was purchased for $1.2B, Nest for $3.2B. These are not small numbers. ADT had an enterprise value of ~$13B prior to the infusion of capital by Google, so relatively speaking, Ring and Nest were still a somewhat meaningful acquisition size.

The sizes of the Google investment and acquisitions of residential-focused hardware/software companies indicate the magnitude of what’s at stake. It’s no secret that Amazon and Google (…and Apple, and Facebook…) are in a “battle for the home”, with Amazon offering a suite of connected products from their Alexa home assistant, Ring doorbell, and Amazon Key for deliveries, and Google offering their Home and Nest suite. Apple also got into the game with their Homekit, and Facebook with their Portal. These are the biggest companies in the world fighting for access to your home – if that doesn’t indicate the stakes of this game, I’m not sure what does.

There are 140M single family homes in the US and more than 21M apartments. Companies such as Invitation Homes own 80,000+ rental homes, while big multifamily owners such as MAA own 100,000+ units. ADT currently has 6.5M recurring customers, and an installation staff of 5,400. Their scale is meaningful relative to the concentration of even the largest single family and multifamily owners. Winning the home means winning a long tail of customers, and a relationship with a company like ADT can bring meaningful scale and acquisition of customers in a far cheaper and efficient way than many other alternatives. This highlights the importance of distribution to get access to real estate. Companies can take a traditional D2C approach to acquiring households by selling to individuals, but partnerships such as Google + ADT highlight the ways that tech companies can leverage partnerships to 1) get into homes at scale faster and more capital efficiently and 2) expand their potential revenue streams. Landlords and managers of large portfolios of real estate should take note that the scale they have can result in distribution that is very meaningful, and therefore very valuable.

The deal naturally brought up conversations about Nine Four portfolio company SmartRent. SmartRent is an enterprise home automation company developing software and hardware to help owners, property managers and renters in multifamily communities. They are the ‘connective tissue’ within a building that binds building hardware (access systems, leak detectors, other IoT devices, etc.) with software that interacts with tenants, leasing and marketing, 3rd parties, and maintenance. Their scale across multifamily units should be attractive to big tech for the same reasons that ADT was to Google. While SmartRent integrates with different hardware devices and systems, Google or Amazon likely want to own those systems too.

Strategic implications aside, the infusion of capital by Google could also be well-timed as after ADT was taken public by Apollo in 2018 (Apollo is still a majority owner), the company is sitting on more than $10B in debt. The infusion of capital is likely a breath of fresh air for ADT, and may set forth a new precedent for relationships between big tech and property owners. COVID is firmly placing how we interact with each other and our built environment in the spotlight, and this is exactly where PropTech investors have focused their energy. We hope to see more news about large-scale partnerships across the real estate landscape coming soon!

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