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Is the "smart home" dead? No, just changing

Nest CEO Tony Fadell left the home-automation company he founded last Friday after months of negative press about his management style, problems with the iconic Nest connected devices and a burgeoning rivalry with fellow Alphabet (GOOG) company Google, which has also started making connected home products.

But the real story is buried in all of the drama. Fadell's departure marks a turning point in the growing field of connected products that are collectively called the smart home. Fadell's original vision for a smart home is a dead end for the industry, one that should be left behind as companies try to figure out how to make use of connected consumer devices and cloud analytics to deliver real value.

Actually, the smart home isn't dead. The way we currently think about it is.

8 features that will make your home "smart"
8 features that will make your home "smart"

Fadell founded Nest, the maker of the iconic connected thermostat, to tackle "unloved" devices in the home. His vision evolved from making smart devices to building a world where connectivity added so much intelligence to everyday objects that they would feed you information based on what you needed to know right then to help you make decisions.

Fadell called it the "conscious home." Nest and Fadell sold this idea so well that in 2014, Google (before the restructuring that created Alphabet as the parent company) purchased the four-year-old startup for $3.2 billion.

Fadell and Google validated the concept of the anticipatory smart home, the idea of some artificially intelligent device managing your home. It was and still is a popular way to think about the future of the Internet of things (IoT) for consumers.

But now, reality is setting in. Companies need to stop selling the smart home. Instead they should focus on selling products that offer some kind of return on investment or a service built around connected devices.

Already some companies have recognized this shift. Silvair, a Polish company building smart lighting changed its business at the end of last year from selling residential lighting to selling commercial lighting. Simon Slupik, CTO of Silvair, said only early adopters were buying connected technology in the residential market.

"The smart home was our target until late 2015," said Slupik. "But it got saturated and went stagnant." He blamed the lack of adoption on interoperability challenges; the bankruptcy of Quirky, a maker of connected technology including the smart-home hub called Wink; and most recently, Nest's decision to completely shut down a company it purchased called Revolv. That left the owners of a $300 smart-home hub with a device that overnight became useless after roughly two years of ownership.

"I feel like the retail model just got stuck at the early adopter phase," said Jan Dawson, chief analyst at Jackdaw Research. "Installing these products is hard and expensive, and the value proposition isn't all that clear."

Even Target (TGT), which last summer opened up a special store in San Francisco to show off connected home products working together to make people's lives easier, isn't seeing a lot of traction in the concept. Instead, it's seeing consumers buy products that solve a single use as opposed to trying to create an integrated smart home.

Jenna Reck, a spokeswoman at Target said, "We still think it's really important to show the potential and whole-home-use cases, but consumers are primarily still purchasing single products with really clear-use cases."

Despite the lack of enthusiasm for Fadell's core idea about an anticipatory home full of interconnected gadgets, companies are still excited about the benefits of adding connectivity and intelligence to devices. Stuart Lombard, CEO of rival smart thermostat maker Ecobee, said his sales have continued to grow 100 percent year-over-year.

He said consumers tend to buy connected products in the security, energy savings and entertainment areas because they offer a compelling reason to spend on a fairly expensive device. "The people who thought that everything had to work together, that wasn't the right vision," he said. "When we would try to tell people that, you could see them lose interest. Their eyes glazed over."

Instead, he said Ecobee focuses on selling its individual device and making sure it can add new features that still provide value. Those are things like voice control through Amazon's (AMZN) Echo, a combination of a speaker and Siri-like personal assistant,

Jackdaw Research analyst Dawson believes that instead of consumers buying their own devices, they'll turn to a service provider such as their alarm company or ISP. Which is why Dawson views Nest's CEO change from Fadell to Marwan Fawaz, who has been an executive at large cable-TV companies, as prophetic of a strategy shift at Nest.

Service providers are used to installing equipment in people's homes, and consumers already pay them a monthly fee to provide a service, which could help offset the high cost of connected gadgets and the cost of supporting them throughout a product's lifetime, said Dawson. Comcast (CMCSA), AT&T (T), Vivint, and ADT apparently agree. They all sell smart home products to consumers.

And while a certain subset of consumers will never buy into the idea of connected devices in their home, everyone I spoke with was optimistic that eventually most mainstream consumers will reap the benefits of smart devices around their homes.

Ecobee CEO Lombard compared it to email back in 1994. He said when he used to give people his business card then, they would laugh because he had his email address on it. No one thought we'd have email addresses on our business cards. But it didn't take all that long before email was de rigeur.

"The connected device business is like the Internet 1994 or smartphones before 2007 [when Apple introduced the iPhone]," he said. "Over the next few years, you're going to see it become an integral part of everyday life."