In 2002, the Consumer Robotics company Iroot released the Roomba vacuum cleaner, which almost immediately became a huge success for a one-time purchase of just a few hundred. You can potentially save multiple hours per week as Roomba can vacuum your floors for you. When the Roomba first came out, this was hail as one of the first practical and affordable use cases for Consumer Robotics. Over the next two decades, I Robot sold over 40 million roombas, generating billions of dollars in Revenue.

Since the ipoed in 2005, the company has been consistently profitable and its Revenue grew to a peak of $1.5 billion in 2021. In addition to their core Roomba product, they also had large Ambitions to make other Home robots, including their Tera robotic lawnmower. However, in 2022, things started to change. After almost two decades of non-stop growth, the company's Revenue started to collapse.

In 2022, they posted an operating loss of 200 million million their first annual operating loss. since going public. In the first 9 months of 2023, their revenue has fallen by more than 50% compared to Peak levels and their operating losses continue to accelerate. With their financial position deteriorating, their Last Hope was to be acquired by Amazon, but these hopes were dashed in January of this year when the European Union blocked the deal on antitrust grounds.

Now, the company's hemorrhaging cash and burdened by an unsustainable debt load. With their share price having declined by 90% it's hard to see how they can avoid bankruptcy. In this video, we'll look at how Iroot became the Undisputed leader in Consumer Robotics in the 2000s and 2010s and how it all came grumbling down. This video is brought to you by Differentiated Analytics.com a website that we created.

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This means that you can get access to everything for just $5 per month. This promotion won't last long, so make sure to sign up now! and with the free resources. this website is accessible to anyone, so make sure to check it out by clicking the link in the description below And now back to the video. Iroot was founded in 1990 and originally didn't focus on Vacuums at all.

Their first product was a military robot called Packbot which could remove and dispose of unexploded ordinance on the battlefield. The problem with these types of robots is that sales volume will always be low. Given their Niche use cases, the military will only order a few dozen or hundred at most. Even if the unit price is high, it's very difficult to sell enough of them to cover the massive research and development expense.

Around the year 2000, Iroots co-founder and CEO Colin Angle had an epiphany. The key to success in the robotics industry is not to make the most technologically advanced robot. Instead, they should make the cheapest robot possible that can actually do something useful. So in 2002, they released the Roomba robot vacuum cleaner.

At the price of just $200 it was access to millions of households. Iroot was not the first company to develop a robot vacuum cleaner. In 2001, the Swedish company Electrolux released the trilobyte. Its technology was groundbreaking at the time.

It used ultrasonic sensors to detect walls and other obstacles. This allows its computer to make a digital map of the room. The troby basically used the same technology that Dolphins used to find prey. It sends out ultrasound waves and senses the sound that Echoes back to identify objects.

The problem was the ultrasound sensors in the computer required to make this work were extremely expensive. The technology was also immature and prone to errors. The traby starting price of $1,800 made it inaccessible to many people. Very few people were willing to pay so much money for an over-engineered gimmicky device that barely works.

Iroot saw the failure of the traby and knew they needed to take a different approach. The Roomba was successful. Not because it had advanced technology. it was actually the opposite.

The Roomba was successful because of its simple design and relatively primitive technology. The only sensor on the Roomba was a bumper on the front. It's basically a giant button so it can sense if it bumps into something. The Roomba made no attempt to map the room.

Instead, it followed a very simple formula: If the Roomba bumps into something, it will turn in a random Direction and drive away. The Roomba has no idea what the room looks like. All it knows is when it bumps into something, it should turn in a different direction. Because of the inefficiency of the random walk, it can take a long time to clean a room.

Some spots on the floor will be cleaned multiple times and some parts will be missed. The The Genius of Roomba's design was its cost. It only required one primitive sensor and an extremely primitive processor. Instead of trying to manufacture it themselves, Iroot hired contract manufacturers in China where labor was cheap.

This allowed them to sell the device for just $200 making it the first truly accessible consumer robot. Throughout the 2000s and early 2010s, Iroot dominated the market. Their revenue grew consistently almost every year thanks to Their use of cheap contract manufacturers in China. Their gross margins were also high.

This allowed them to spend heavily on Advertising to build up their brand awareness while still having enough money left over for a healthy operating margin. Of course, success invites competition. In 2010, the German company Neo Robotics released the first robot vacuum to incorporate a light detection and ranging or light R system. It's similar to what Electrolux tried 10 years prior with the Troby, but instead of using ultra sound, it emits laser light and a frequency not visible to the human eye.

It can detect objects by the Reflections in the laser light. This allows the Neato to make a map of the room and navigate it in an organized manner as opposed to the random walk of the Roomba. The downside of using Lar is that it's expensive. When the Neato was launched in 2010, it cost $400 roughly double the cost of the Roomba.

Remember that Iot's entire strategy up to this point was to keep costs as low as possible. Given the high cost of Lar sensors, they were naturally averse to using them. Here's a short clip of Iroots CEO explaining why they don't use Lar in 2019. Uh, an important moment maybe two years ago where you could put Machine Vision capable processors on robots at consumer price points and I was waiting for it h to happen.

We had avoided putting lasers on our robots to do uh navigation uh and instead spent years researching how to do U vision-based Navig Ation because uh, you could just see it where uh these technology Trends were going and um between injection molded plastic and a camera with a computer capable of running machine learning and visual object recognition. I could build an incredibly affordable, incredibly capable robot and that's going to be the future. Regular cameras are much cheaper than Lar sensors. iroot.

CEO Believed that with advances in artificial intelligence, they could achieve the same or better performance with cameras instead of Lar. Iroot started using something called visual Simultaneous Location in Mapping or Vslam For sure, a camera is mounted on top of the Roomba By looking at the ceiling and other visible landmarks. The robot's computer can infert the location of objects and make a map of the room. With Vslam, the roombo is finally able to vacuum the floor in a non-random way.

While Vslam is an Innovative solution, Lar is still far more accurate. The Lar is able to identify objects lower to the ground that the Vslam camera would miss as it's angled upwards. The advantage of Lar is that it has depth perception. The Lar can see something right in front of it and can tell how far away it is.

This is how it's able to make a map of the room. This is much more difficult to do with a camera because it has to identify any object it could possibly come across. This is one of the reasons that developing self-driving cars is so difficult. Using camerab based computer vision on a robot vacuum is actually much more difficult than making an autonomous car.

The variety of household objects in room configurations is almost infinite, so the computer has to be smart enough to identify objects it has never seen before. Ioot thought that they could develop artificial intelligence models powerful enough to solve this problem. They were wrong. To this day, their robot vacuums are still using Vslam, which is less accurate and has inferior performance compared to Lar based vacuums.

Remember that iRobot uses contract manufacturers based in China. Given that these facilities already exist, it's very easy for Chinese startups to designed their own robot vacuums and use the same contract manufacturers. One of Irobot's contract manufacturers is Byd. Byd is best known as an electric car manufacturer, but they also make batteries for Consumer products and do contract manufacturing for a wide range of electrical appliances, including robot Vacuums.

There's a robot vacuum company called Leant, which also appears to use Byd as its contract manufacturer. The point is given that the infrastructure already exists, it's extremely easy for Chinese companies to enter the market. Historically Chinese Robot Vacuum companies have competed primarily on cost. Take the example of this vacuum for sale on Amazon for $145 Cheaper than any Roomba model.

It's completely unbranded. There is no name brand or logo on the vacuum itself. Even the product title does not mention its brand name. The strategy is to spend as little as possible on research and development or marketing.

This allows them to make the products as cheap as possible and undercut iRobot on price. At first, Iroot didn't view these cheap, unbranded competitors as a threat as the Roomba still had a quality advantage over most of them. However, the competition from China ended up being far more serious than they expected. In the late 2010s, the Chinese companies, Ecox and Robor Rock started competing on the high end of the market developing branded and technologically advanced robot vacuums.

Unlike iRobot, both Ecox and Robor Rock opted to use Lar sensors, giving them a clear advantage in mapping rooms and navigating the floor efficiently. In addition to Lar, Robo, Rock and Eov have developed other features. For for example, the flagship models of both brands have Auto disposal features so you don't have to remove the dust tray manually. They can also detect whether they are on a hard floor or a carpet and automatically switch between vacuuming and mopping.

The most advanced models can cost over $1,000 far more than what Roomba sell for. There are a surprising number of news websites and YouTube channels dedicated to robot vacuums. Pretty much all of them agree that Robo Rock and Ecox are leaders. For example, this article from the New Zealand publication Robo Mate, is comparing the Lat latest Robo Rock and Eax Vacuums.

They don't even consider iRobot as a serious Contender due to its lack of Lar. In a recent video, the YouTube channel vacuum Wars compared over 90 different robot vacuums on a variety of different performance metrics. Of the top five overall picks, there were all Chinese Brands The two mid-price picks were also Chinese Brands The Iroot Roomba only one in the budget category. As recently as 2016, Ioot had a dominant 65% share of the global Robot vacuum.

Market On the highend end, they're losing share to Robor, Rock, and Ovax. On the low end, they're losing share to countless unbranded ultra-budget Chinese models. As of 2020, Iroots market share declined to 45% Since then, their market shares continue to decline although we don't have exact data despite losing market share since 2016, iRobot still posted positive Revenue growth through 2021 as the overall Market was still expanding, but we could start to see the financial impact in 2021 despite achieving record Revenue iRobots gross profit actually declined and their operating profit declined to almost zero. Iroot was forced to cut prices on many of its robots to keep up with the Chinese competitors.

The next two years were catastrophic with Revenue imploding by more than 50% and after more than a decade of profitability, their operating profit turned sharply Negative They are now burning cash and have $200 million of debt. So how did iRobot the Undisputed leader in robot vacuums for two decades see its business collapse in Just 2 years? The most most surprising aspect of Iroots decline is that throughout this whole period, they spent far more on research and development than any of their Chinese competitors. For example, in the first 9 months of 2023, Iroot spent $17 million on R&D while Ecovac spent just $85 million. Yet, EA's premium models are universally considered to be far better than anything Iroot has been able to come up with.

So how did I Robot Falls so far behind? despite having such a large head star? Just because you have the largest R&D budget, doesn't mean you'll come up with the best Innovations There were a couple big mistakes that Iroot made. Remember how the CEO said they didn't need Lar because their artificial intelligence would eventually become so Advanced that they can do just as well with regular cameras? They indeed invested a huge amount of money trying to develop AI models to do just that. It turns out that this problem is far more difficult to solve than they originally thought. Despite a huge amount of investment, their camera based systems are still far inferior to Lar.

There is also a more fundamental problem. After a achieving dominant market share in Robot vacuum cleaners, they became arrogant. They didn't view the Chinese competitors as a threat, thinking that they can only make cheap, lowquality vacuums, so they diverted a substantial part of their R&D budget to new product categories. For example, since at least 2015, they've been trying to develop a robotic lawn mower.

There have been a few key problems: If you've ever mowed a lawn, you will know that grass clippings get thrown around everywhere. The camera on the robot will inevitably become obstructed by grass or other debris. Also, the lawnmower VI vibrates up and down significantly due to the power of the blade. This would confuse the robot if it tries to use computer vision.

The intense vibrations also make light are unworkable. Due to the technical challenges, the lawn mower was repeatedly delayed and to this day has not been launched. Iroot also created programmable educational robots which kids can use to learn about coding and Robotics Perhaps their strangest business expansion came when they acquired a Swiss Air purification company called Ays in 2021. The air purifiers are not robots, and it's hard to see how this has any synergies with their Core Business of robot vacuums.

Because Iroot felt so secure with its dominant market share and vacuums, they got distracted trying to expand into new product categories, almost all of which ended up being flops. This distraction caused them to neglect their Core Business allowing competitors like Robo Rock and Ecova to surpass them. By the summer of 2022, it had become obvious that Iroot was facing increasing competitive pressures and its stock had fallen by 70% from its all-time highs Amazon Took advantage of this and offered toire acquired the company for $1.7 billion. While this was much lower than Irobot's all-time high valuation, shareholders were happy to take the deal given the company's deteriorating situation.

Amazon has long been trying to build an ecosystem of smart home devices such as the Alexa Voice Assistant and the ring Smart Doorbell. By acquiring Iroot, they could integrate Roomba into their ecosystem which could further enhance their smart Home value proposition. But there was a problem: More than 20% of Iroot sales are done through Amazon That percentage is even high for some of Irobot's competitors. Regulators Feared that if Amazon acquired Iroot, they could give Roomba priority on search results and an effort to boost sales.

In other words, they would have an incentive to shadowban Roomba's competitors. This would give Roomba an unfair advantage. In January of 2024, the European competition Authority blocked the merger. This was a disaster for iRobot The Amazon acquisition was the last chance for their shareholders to cash out.

Now they're stuck with a rapidly declining and money losing business. iRobot is in a truly desperate situation. They have $190 million of cash on hand, but they also have a $200 million Term Loan that matures in 2026. They're burning cash at a rate of $150 billion per year.

They'll get a roughly $100 million termination fee from Amazon But unless they can turn things around, this will only delay their bankruptcy by a few more quarters right now. After the Amazon deal was blocked, iRobot announced a restructuring plan which they say will save $80 to100 million in annual operating costs. The first part of this plan is firing the co-founder and CEO Colin Angle, who has led the company for the past 20 years. They're also laying off onethird of their Workforce pulling out of underperforming geographies and aing all their non-core businesses including the lawnmower, educational robots, and air purifiers.

They will focus exclusively on their core Roomba product. While the restructuring is probably a good idea, it might be too late. Even if they cut $100 million of annual costs, they're currently burning cash at a rate of $150 million per year, so unless they can reverse their declining Revenue they'll still be losing money. If anything, their revenue decline will probably accelerate as their marketing and R&D budgets will take a massive hit from the restructuring.

At this point, Eax and Robor Rock are so far ahead of Iroot that no matter what they do, it's probably too late. Iroot is a story of arrogance and complacency. They were a Pioneer in robotic vacuums, but instead of defending their position with continuous innovation, they began expanding into ever more unrelated products. This provided an opening for their competitors to overtake them on their Core Business All right guys, that wraps it up for this video.

What do you think about Iroot? Let us know in the comments section below. Also, don't forget to check out our new website Differentiated Analytics.com and take advantage of our limited time. 75% off promotion with promo code WSM 75 As always. Thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.