Making Money in Smartphone Sensors

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While there are hundreds of millions of apps that extend the software capabilities of smartphones using whatever hardware already comes shipped with your iPhone or Android, there are thousands more that extend the hardware capabilities of the phone by shipping physical hardware. These hardware extenders provide physical functionality that does not ship on the device, and connect to the phone, usually via Bluetooth, the same way your modern car's audio system (or Apple TV) extends your phone by providing a large microphone and speakers.

Examples include button-sized item locators (sticknfind, tile); heart-rate sensors (Blue, Jarv); pedometers (FitBit, Jawbone, Nike); etc. Christian Del Rosso has collated a list here.

The "smarttender" - or "smartphone extender" - market is just beginning to explode, thanks to the convergence  of several key enabling elements:

  1. The ubiquity of smartphones and their attendant Internet connections
  2. The growth of App Store and Android Market
  3. The low cost of hardware prototyping using Arduino and similar devices and hardware manufacture
  4. The availability of low power Bluetooth.

How do you pick a good market for a smartphone extender (smartender)? Or, conversely, if you have one, how do you improve your odds of success? For any to succeed commercially, it needs two key characteristics:

  1. Sufficiently large market for the price: If it is too small, you will lose money. Unlike pure software, the marginal costs of each product are not near-zero, and you may have fixed manufacturing costs, which means you need to sell far more of the item to break even, let alone make a profit. If the market is small but you can charge more - e.g. medical devices for doctors - it eventually becomes expensive enough to warrant its own standalone device. Professional-grade and professional-price heart-rate monitors are more likely to embed screens and WiFi in the device, then eliminate them and connect to a phone. I believe the price ceiling for such a device to be around $100. Anything over that starts to look like a fully standalone over time, and is a big reason why FitBit and the others are price at $100.
  2. Sufficient deterrence to embedding in the phone: While you don't want too small a market, you also don't want to be in a position where it becomes so common a use case that manufacturers decide to embed it in the phone, this killing your external market entirely. Anyone still use a separate flashlight app on their iPhone since iOS 7 was release? Remember few years back when you could buy an external GPS for your iPhone?

A company can avoid the manufacturers stealing their market in one of three ways:

  1. Market Size: Stick with a market that is large enough to be profitable, but not useful by 1/3 or more of smartphone owners. Handset manufacturers do not want to spend money embedding hardware that will not be used by half or more of their customers.
  2. Distance: Create objects that are inherently more functional by being away from the device. FitBit and Jawbone have taken this approach with an on-wrist device; StickNFind and Tile have taken this approach by using the phone (always on you) to find things that are far away from the phone.
  3. Unique Capability: Have some functionality or capability that is difficult for manufacturers to replicate, either due to skill or intellectual property protections.

Unique Capability is the last because, quite frankly, it is the weakest. You are always better off having a large competitor on which your business absolutely depends having zero interest in taking you down. And the large manufacturers have the resources - legal and financial and technical - to do so, should they so choose.

The "smart sensor" market is fascinating, enormous, and just beginning; pick your particular market carefully.