What the New CHIP Standard Means for Smart Home Startups

When most people hear the word “chip” in the context of a smart home, they immediately imagine the microchips at the heart of their smart devices. But whereas chips power the brains of an individual smart device, will power the brains of an entire smart home. CHIP will offer huge conveniences to consumers, but its openness may make it harder for hardware startups to build ecosystems and defend against inexpensive knock-offs.

What is CHIP?

(or CHIP for short) is a new software protocol that allows all devices on a network to classify, announce, and control themselves and each other, with backing from Google, Apple, Amazon, and others. Whereas today connecting devices between different services require the developers to build API support for each other and consumers manually connect each service to each other, CHIP allows these devices to discover and talk to each other natively, without any configuration on the side of the user.

Why this is great for consumers

Because CHIP allows devices from different brands to natively communicate with each other, end-users will be able to mix and match hardware from different vendors without ecosystem lock-in. Not only will motion sensors from SmartThings, cameras from Wyze, lights from Phillips Hue, and locks from August all be automatically detected and added to Alexa and Google Home, but they also will be able to easily and automatically discover and coordinate with themselves.

Further, consumers will not be forced to always buy from the same vendors, allowing them to mix and match bulbs from LifeX, Wyze, Hue, GE, and any other brand and coordinate their brightness and colors perfectly, without using third-party tools like IFTTT.

Why startups should be worried

Some startups will undoubtedly benefit from the implementation of the CHIP standard, as it means engineers can spend more time focusing on product, and less on integrating with tons of other APIs. However, the ease of integration with other devices comes at a high cost: ecosystem development and defensibility. Most players in the smart home space have rapidly expanded from their core product into an ecosystem of products that work together. This ecosystem strategy is essential for them, as it allows them to grow revenue from both new and existing users.

The home security space is an excellent example of ecosystem expansion. Ring has expanded from doorbells to cameras, security systems, and smart outdoor lighting, Wyze has expanded from cameras to sensors, locks, and lights, Nest has expanded from thermostats to cameras, smoke alarms, and entire home security kits, and August has expanded from locks into keypads and door cams.

Users who buy a Ring doorbell are far more likely to buy a security system from Ring than from Nest, simply because they have an expectation that the entire system will interoperate better together.

CHIP will make everything interoperable, greatly reducing the ecosystem incentive to buy products from the same manufacturer, and making inexpensive knock-offs a much more attractive option to the everyday consumer. Just as easy integration with Google Assistant and Alexa has led to an explosion of inexpensive smart plugs that undercut Belkin’s WeMo product line, we expect CHIP to create a glut of inexpensive competitors to virtually every smart home device, making it difficult for the early innovators to compete with their new low cost competitors. Hardware founders may need to develop new business models to generate recurring revenue, hopefully in ways that don’t irritate the user by selling data or charging monthly fees.