Mattel's Aristotle Connects Wired Child, Smart Home

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“Alexa, play digger, digger,” the redheaded, still-learning-to-speak toddler in the video appears to tell a small electronic device on a bedside stand.

The family’s new Amazon.com (AMZN) Echo Dot, one of the more popular voice recognition personal assistant devices, replies:

“You want to hear a station from porn detected, porno ring tone, hot chick amateur girl …” Frantic relatives scramble to shut off the device as it veers into some highly NSFW (not safe for work) language.

The now-viral video is a prime example of how cutting-edge language recognition tools fail when faced with kid-speak. Toy maker Mattel (MAT) recognized the failure as an opportunity: a market niche for a kid-focused, parent-controlled smart speaker amid a growing connected-home market.

Alexa, Meet Aristotle

Launched this month at CES, the Consumer Electronic Show in Las Vegas, Mattel’s Aristotle sets the market’s early standard. Slated to hit the shelves this summer, the gizmo is the brainchild of Mattel’s Nabi unit, the maker of colorful children’s tablet computers acquired a year ago for $21.5 million from its bankrupt parent, Fuhu.

The friendly-looking red-and-white, camera-equipped Aristotle looks like a cross between an Amazon Echo and a baby monitor. The design is a joint effort between Mattel, Qualcomm (QCOM), Silk Labs, and Microsoft’s (MSFT) Cognitive Services and Cortana Intelligence.

Cortana is Microsoft’s voice recognition personal assistant product, similar to Apple’s Siri, Amazon’s Alexa and Google’s Assistant.

Aristotle is no Echo. The design is uniquely tailored to recognize the idiosyncrasies of young children’s speech. The cost of that development reflects in its $299 price – more than double that of the devices geared for grown ups.

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But even at that price, Aristotle earns its keep. It starts with a WiFi-enabled camera capable of motion detection and object recognition. It’s got a “smart light system” that includes a night light, reading light and changing light. And new parents will probably be intrigued to know that Aristotle can not only reorder baby supplies, but also flick on a lullaby and dim the lights when the little one wakes up crying.

“Our solution is hyper-focused on the nursery and in early learning,” Mattel Senior Manager of Marketing and Communications Lisa Lee told Investor’s Business Daily via email.

The company aims to introduce Aristotle to a home at around the same time a baby is coming into the family “because it is firstly, a voice-controlled smart baby monitor,” Lee said.

Aristotle is first, a smart baby monitor, but can also quiz kids on ABCs and teach foreign languages.(Mattel)

High-tech nursery gadgets aren’t new. Mattel-owned Fisher-Price offers smart rockers, swings and crib mobiles. Nabi also makes kids’ fitness trackers, as well as tablet computers.

But security and monitoring is where many consumers dip their toes into connected-home products, said Ben Arnold, NPD Group’s industry analyst for consumer technology. So it’s not surprising, he says, to see a product that combines remote monitoring, a sound machine and changing lights to soothe a child.

It’s “pretty much in line with the overall movement in the smart home market,” he said.

A Budding $200 Billion Market

The smart-home, or connected-home, market is projected to hit $83 billion this year and more than double to $195 billion by 2021, according to Juniper Research. The category is broad — it includes automation, lighting, entertainment, wellness and monitoring — with enough products to fill a “Jetsons”-style home, from Philips’ wireless Hue bulbs to Nest’s smart thermostats and smoke alarms to Samsung’s extensive SmartThings line.

Amazon leads the way, said the report, followed by Samsung, Google owner Alphabet (GOOGL) and Apple — and the “Big 4” aren’t likely to give up their spots anytime soon. But among specific sectors, the maturing smart entertainment segment is seen slowing as smart appliances and home automation take hold of consumer interest.

“The share from connected services such as Netflix and Amazon are set to fall from 70% of the total market in 2017 to 50% in 2021,” said Juniper. “Meanwhile, growing segments such as Monitoring & Automation will be driven by disruptive entrants, such as littleBits, Notion and iVee, who will rival established players by taking novel approaches to product development.”

In the smart speaker/digital assistant space, Aristotle joins the $180 Amazon Echo, $129 Google Home and another CES debutante, the Google Assistant-equipped Nvidia (NVDA) Spot. (The Spot — a small smart speaker that can go in any room — enhances the reach of the Shield, Nvidia’s new media-streaming device.)

It’s a hot space: After its Fall debut, the Google Home quickly became the fifth best-selling wireless speaker brand on the market, with 7.3% dollar share, according to November 2016 data from NPD. (A notable asterisk: the firm does not track Echo sales data, and the category is admittedly broad and includes more traditional wireless speakers.) Google zipped up to the No. 5 spot behind JBL, Ultimate Ears, Sonos and top dog, Bose.

We’re on a “good course” toward the mainstreaming of smart speakers, said Arnold, although it remains to be seen what kind of applications will be most popular among users. Hailing an Uber? Ordering takeout? Making to-do lists?

“It’s less about a speaker that sits on your tabletop and more about (how) your digital assistant can work its way into your lifestyle,” he said.

The Aristotle’s focus on child care means it is unlikely to challenge Echo as a mainstream hit. But the smart speaker is designed to help kids of all ages, providing a stealthy opportunity for it to grow on the family whom it serves.

According to the company, the device can quiz toddlers on their ABCs, help grade-schoolers with their homework, and teach tweens foreign languages.

That kind of stickiness is valuable — especially as young people gravitate toward AI help. A recent Accenture study said 31% of 14- to 17-year-olds use voice-enabled digital assistants regularly vs. just 14% of 35- to 55-year-olds, according to eMarketer.

And should it choose to, there’s precious user data to be mined for Mattel, including “regional idiosyncrasies, national (trends) that are sticking” or even what kind of product it should be distributing to retailers like Target (TGT) or Wal-Mart (WMT), said Morningstar analyst Jaime Katz.

Every Home A Smart Home In Five To 10 Years?

Amazon, that destroyer of publishing and retail worlds, is poised to stay ahead of the pack.

NPD’s Arnold pointed out that there’s a “decent amount” of overlap between Aristotle and Echo’s capabilities, and suggested that the continual tweaking Amazon does to Alexa could narrow that gap.

“You could certainly have a scenario where Amazon improves Alexa and she’s able to differentiate (between) kids’ voices,” he said, conjuring up an Alexa of the future that would be able to cater specifically to whomever is talking to her at the time.

Mizuho Securities points to the combined power of Amazon’s Echo and Alexa amassing $11 billion in revenue for the company by 2020.

Calling Amazon a “leader in home automation,” Mizuho analyst Neil Doshi wrote on Jan. 9 that he sees $4 billion of that revenue coming from sales of Echo devices and the rest stemming from Alexa-based transaction revenue.

How much revenue potential the Aristotle holds for Mattel isn’t immediately clear.

Morningstar’s Katz says sales from Aristotle are “incremental, but not something that changes the overall valuation of (Mattel’s) business.”

Mattel’s Lee declined to comment on projected revenue, but said the company sees “ample opportunity to bring new technology-enabled play and learning products to market.”

And as the smart home pie grows ever larger, devices like Echo, Home and possibly even Aristotle could challenge smartphones to become the nerve center for a home’s connected electronics.

With an estimated 22 million connected homes in the U.S. last year, according to a recent McKinsey report, that number is expected to grow to 29 million this year, with a compound annual growth rate of 31%.

“With technological advances in voice control and artificial intelligence, the intelligent assistant is now a viable control center for the connected home,” wrote McKinsey researchers, who wrote separately that they see connected-home penetration rising from “from 22 percent today to every home being connected in five to ten years.”

And even as Alexa poses a threat to the dirty-word-free innocence of childhood, Mattel isn’t looking for a fight. It sees Aristotle, which also includes Alexa as a built-in digital assistant for the grown-ups, getting along just fine with the Echo and Home.

“We don’t compete with other voice-assistants or home automation devices,” said Mattel’s Lee. “If a household utilizes other smart home devices, Aristotle will be compatible with a growing number of other (Internet of Things) systems.”