Joe Data of Smartlabs – West Technology Research Solutions

George West conducted interviews of industry leaders. These were published in the WTRS Newsletter on a regular basis.

Joe Data – Chairman of Smartlabs

1. Can you tell us a little about yourself and your background?
At the turn of the century, my Grandfather ran away from an orphanage at the age of 5. A man that worked at the stockyards in Chicago saw him eating out of the garbage can and brought him home and brought him up is a little town of Gurney where he became the founder of the fire department and the public works department on Gurney Illinois, which is where I grew up. So that’s my background. I went and got an engineering degree in Illinois. After engineering school, I decided I liked studying engineering better than being an engineer, so I got an MBA and focused on finance. By happenstance I hacked into one of the professor’s software programs to get it working on IBM compatibles and that brought me into the software business. After school I was writing software for very large money managers, got a job as a portfolio engineer, if you will, for a very large, $7 billion money manager in Wisconsin. Then I worked up through the ranks to become a portfolio manager, went into sales and marketing in that field. By the early 1990’s I felt I wanted to get out of that industry and that I wanted to do something much more entrepreneurial.

2. What can you tell us about Smart Labs and smarthome.com
A partner I had worked with and I looked at a bunch of different opportunities, everything from gas stations to software. We decided we really wanted to do something that was high-tech. We saw an opportunity in the affordable home automation and control space. We found these little products around in onesies and twosies at specialty electronics stores, maybe a few at Radio Shack, but no single place that really focused on the home automation. So that’s when we started to launch what is now SmartLabs, the Smarthome catalog and smarthome.com. Originally we were just catalogers in 1994 when we were looking to build a bulletin board service we stumbled across this thing called the World Wide Web. We realized that the demographic for potential web users was our demographic and it was the perfect match for us. We went live with Smarthome.com on February 25, 1995. Within a couple months it was clear that we had a tiger by the tail and so we started coding 24-7, hiring interns from UC Irvine, and had a fully functional e-commerce site with over 1,000 products by the end of the summer of ’95. 1995 was a real turning point for us as we got online and were way ahead of the competition. By 1996, we knew that there were products our customers were crying out for that the manufacturers were not making. So we bought a couple of small engineering firms. Homerun Automation was one of them and Dan Cregg was the owner and chief engineer. Really the reason we went after that company was to get Dan. In 1997, we launched what is now SmartLabs Design to develop our own proprietary products. The first product was a 2-way dimmer switch, which was the thing that the market kept asking for that we couldn’t get anyone to build. Very quickly it became our best selling product and we were off and running.

3. What about the history of INSTEON? How did INSTEON come to be developed?
Within a couple of years, we had a pretty nice suite of products and I thought it might be the right time to test building a retail sales channel. Within a week or two of talking with the Circuit City’s of the world it became clear that the market had already tested X- 10 and voted ‘no’ on it. If we were going to reach a broad market we were going to have to have a better foundational technology on which to base them. So in 2000, we started development on what is now INSTEON. Four years later, as you know, we launched our first developer’s kits. We are now over 800 developers. In May of last year we started shipping products, and we shipped our 100,000th product early last week. In terms of SmartLabs, it became clear last year that that there was some confusion, or at least misperception, that if people were talking about INSTEON and trying to understand how a “catalog” company could develop a technology, it was clear that the name and the branding was causing confusion in the marketplace so we felt it was much more clear to create a parent company and define three business units: Smarthome, which is a “.com” and a catalog company; SmartLabs Design, which is a product company; and SmartLabs Technology, which is a technology company. It certainly seems to be working. We started as a total boot-strap operation. I had raised very, very little capital. The initial amount was just my meager savings and what I would sign over from my paycheck. I did a very small friends and family round in 1994. I raised a little bit more friends and family to start up the engineering operations. In 2000 we brought in one corporate investor. We haven’t raised a penny in over six years. We have a viable business model that is sustainable in just about any economic environment and I believe that that is an enormous competitive advantage vis a vis our competitors. I don’t believe that any of them have sustainable without outside capital for some period of time in the future. That is not in any way, shape, or form a commentary or opinion on their quality of technology or business management. Smart Labs Technology would be in the same boat without the rest of the company. As you know, we have been attracting an ever- improving quality of board with the addition of Gil Amelio and Charlie Jerabek. I think even the board has a hard time believing what we have here. And if ever the magic runs out, we want to keep our options open. We might want to raise capital from an acceleration standpoint, as opposed to a need standpoint. It’s just that for me now, raising capital is almost like a foreign concept.

4. Its truly an amazing story that you were able to get here totally on organic growth. I am truly admiring of that. If I can ask another question, what is the value INSTEON value proposition to OEMs and other partners?
I believe that the value proposition today is in most cases unique to the manufacturer. In today’s world and with any early-stage “standard”, sometimes it’s the intra-brand opportunity that really drives the value proposition in the early days. As an example, the Broan application whereby it can network their exhaust fans and compete with a much more expensive alternative. To somebody like First Alert, they not only can network their devices but they can reach out to control other devices, developing an inter-brand opportunity. In the thermostat world, there are people who (a) want remote control, but (b) also want to link in their outside temperature sensors and other devices. It’s fairly specific to the manufacturer, and in the early days it will be favoring the Intra-brand opportunity a little bit more. As INSTEON continues to grow its market base, in an ever-increasing way the Inter-brand opportunities will come to the forefront. In the future, Inter-brand applications like automatically turning off the dishwasher while you are in the shower will drive the home automation market. So you start with the simple, very easy to understand, single brand opportunities and then you move towards those multi-brand opportunities.

5. Can you discuss how smarthome.com enhances the business proposition for your INSTEON partners?
We are, by far, the number one place that people go to buy home automation products. In fact, our catalog operations benefit by carrying the product lines of both our partners and our competitors. So what better place for our INSTEON partners to launch a new product? Even more importantly, perhaps, is the fact that because we own that channel and because we have such a rich and deep contact with hundreds of thousands of these customers, we can be sharing unique insights with our partners that may be surprising, but it’s what the customers want. This gives our partners the opportunity to make additional modifications or alterations to their product design that, in our experience, will certainly increase the penetration of that product. So given our integrated business model, the value to INSTEON partners starts the day we start talking about new products and continues all the way through to after the product is released. Our products do so well in comparison to the competition and of course I would like to think it’s that we are so brilliant, but I think that it’s due simply to the fact that we just listen to our customers. We just listen to our customers. Well, you know what? A very high percentage say they want green dimmers, well okay, we will make some green dimmers. And then when we ship them, the market says that’s brilliant. The basis of everything we do is: listen to the customer. The history of our industry is just littered with products that people could make, but no one wanted to buy them.

6. Can you tell us a little about the INSTEON Developers Conference?
The interest in the conference has been great. So we are excited about that. I think every one of these annual-type shows has a little different energy. You never know what it’s really going to be like and we are very excited about it. We are going to follow it up with a very hands-on conference within a couple months. So I think that the one-two punch will end up really helping people to understand the opportunity and the challenges that INSTEON creates in the market as well as the hands-on experience to run with the ball and get from here to there fairly quickly. Because INSTEON and Smart Labs has invested somewhere in the area of 5-10% of the amount our competitors have invested in public relations, I would expect that the awareness of that group of people will increase dramatically. What we typically find when we talk to people is that all the press that a company creates generates an understanding of what they are doing. The difference in magnitude creates a perception. When they really dig into INSTEON and find out how simple, reliable, and affordable it is and how we win all three dimensions, their perception changes. I am hoping that this developer’s conference will be the starting point for opening discussions that will level the playing field, if you will, with facts and not marketing message.

7. Are there any cool new products being announced by SmartLabs?
Yes. As far as our INSTEON products go, we are releasing dimmer and relay versions in a toggle style. We are also offering dimmer and relay versions of in- line modules. This is a great example of where the customer has a voice. I have never ever used an in- line module in any of my homes. I just don’t have any use for it. It looks complicated, it’s just not my idea of a product that makes sense. But we did a survey a couple months ago of “dear customers, what do you want to see next”, and the in-line module was #2 to software.

8. You are rumored to be building a home back in Wisconsin. Are you wiring it for HA from the start? What does this involve?
Of course I am, but I’m not. My vision of remote and automatic control in the home is that it needs to be wireless because when you build a home you don’t know exactly where you are going to want to put all the connections until you live in it for a while. I did run an unbelievable amount of cable from here, there, to everywhere and I am finding that the value of that cable is well below what I expected it to be when we built the place. Things like: ‘oh, the TV really doesn’t work there, does it?’ I have loaded it up with over a hundred INSTEON lighting nodes. So it should be a fantastic showcase for us in the Midwest, unfortunately its out in the middle of nowhere. Its 3 hours from Chicago O’Hare. The bottom line is my homes are working laboratories. We need to listen to our customers, but we also need to live the life. Its just way to easy to think that the products are perfect out there without any issues. Best case is to live it, second best case is to sit and listen to your customers to understand what they want. I find both the most motivational things in the world in terms of product development. The real challenge for the development of the home automation market is that words do not adequately describe the value a consumer can derive from an automated home. You have to see it to want it. It is very difficult to convey the value proposition to the consumer because everyone uses it differently. It’s very visual. Our industry has suffered from more bark than bite. Everyone is waiting for that tipping point. But that is not the way consumers work. The growth of this industry will be more organic than exponential. That said, it is good for the industry as a whole that some people are spending so much vocal time educating the consumers.
More information about SmartLabs…

This interview ran in our May 2, 2006 newsletter