Less than eight months after taking the security industry by surprise with its acquisition of Milestone Systems, one of the world’s leading providers of video management software, Canon dropped another bombshell on the market this week when it announced plans to acquire Axis Communications for just over $2.8 billion. With these two acquisitions, Canon has catapulted itself to the top of the video surveillance industry. However, there remain a lot of unknowns about what the combined forces of these companies will ultimately mean for the market.
At first glance, it would appear that Canon has formed a video surveillance juggernaut – bringing some of the best hardware and software products the industry has to offer together under one roof. In fact, according to IHS, the newly combined Canon company would be the largest video surveillance company (by market share) in the Americas and the third-largest from a global perspective, behind Hikvision and Dahua. However, the success that both Milestone and Axis have enjoyed throughout the industry has been due in large part to the technical partnerships they’ve developed and fostered with companies over the years, many of which may now be put to the test.
Additionally, how will this deal impact future acquisitions in the industry? Will the pace of consolidation increase more rapidly now as other conglomerates with cash to spend see their opportunity to increase their market share through buying other leaders in the market? SIW recently reached out to a variety of subject matter experts across the industry to get their initial reactions to the deal and how it bodes for the overall market moving forward:
Bill Bozeman, CPP, president and CEO of PSA Security Network: It is certainly not just Canon, the physical security industry, in general, is experiencing a trend where large, cash rich international companies are buying their way into what they perceive to be a fast growing industry. Driving this consolidation is not just the staggering amount of cash on the sidelines, but also the unrealistic demand from customers and consultants who want to deal with one magic solution that delivers everything they desire. Eventually, our industry will get there, but we are not there as of today.
The real question is who does this rapid non-stop consolidation benefit? Does the large acquirer benefit? Ask them two to three years after an acquisition. Does the end user benefit? Does the integrator community benefit? In a perfect world, the answer is yes, everyone wins. The problem is we do not live in a perfect world.
Jeff Kessler, managing director, Imperial Capital, LLC: From Canon’s point-of-view, it is very good for Canon. In the camera space, they were obviously a leader in the photographic video and camera space; that space being intermediated by cell phones and other types of digital media, which has been putting pressure on its photographic business. They had very little security presence on the video side. The acquisition of Milestone eight months ago was certainly a shock to the industry, but the acquisition of Axis, while it was a shock to the security industry, actually is strategically very important for Canon since they can now put together two companies that were very closely tied to each other with Milestone being Axis’ leading partner on the video management software side. Now, clearly Canon’s strategy is in place that they have two of the leading brands, if not the leading brands in IP network video and they have become a major player in that area, particularly at the top end and competing with Sony and Panasonic but less so with the lower-end cameras coming out of China. But this puts them squarely in the middle of the game.
As far as Axis goes, number one, it is obviously great for Axis shareholders getting a 50 percent premium over the previous closing day’s price. From our point-of-view, was Axis running out of roadway in terms of its growth rate? We had an inline rating and a price target that was about the price where Axis was trading before the announcement and the reason was that we saw growth was slowing at Axis. The law of large numbers was catching up to this innovator, founder and basically leader in IP video, but also the market was changing and Axis remains the leading provider of IP network video cameras and solutions. Nevertheless, we began to see its market share perhaps eroding. They were remaining ahead of companies like Sony and Panasonic in IP video and a bunch of smaller companies, but that was principally at the mid- to high-end where we see Axis continuing to have a dominant or leading position along with a couple of other companies. But clearly, if you look at the triangle of video services and video cameras, that whole mid- to bottom area of the triangle was being honed in on by lower cost manufacturers of both analog and lower cost IP network video.
What this means in a larger, general sense for the industry is number one, this proves out a thesis we’ve been writing about for four years now of what we call the horizontal strata collapse in the video solutions industry. You once had dedicated discreet VMS players, camera players, storage players, and the analytics companies. What we’re seeing now is a collapse of these various discreet elements into a single solution, which for the integrators… makes it a lot easier for them to go to a one-stop solution and create a better relationship between them and the end user. It may crimp the best-of-breed capabilities because you have a little bit less innovation when you have smaller companies that are focused on one area consolidated into a larger company. There is no independent leader in the security industry that’s not part of a larger company that’s too big to acquire.
Ray Bernard, PSP, CHS-III, principal consultant for Ray Bernard Consulting Services (RBCS): The convergence of consumer video technology and security surveillance technology gives this acquisition tremendous potential for both Canon and Axis. Security surveillance technology is expanding to include HD and 4K Ultra HD video, as well as improved analytics. There could be significant synergy between the Canon film and television technology groups (products for professional movie & TV production) and Axis. Already Bosch has shared automobile video analytics technology with the Bosch security group. Consumer technology convergence holds great promise for advancing security surveillance technologies. From that perspective, this acquisition makes a lot of sense. Especially true because Axis (the originator of network video) has people with great vision, a highly capable product development group, and a generally high caliber of personnel all around, including in sales and marketing.
Pierre Racz, president, CEO and founder of Genetec: Axis was not a competitor of ours, they were more of a partner, but when we lost a couple of the other competitors (in the market) – customers lost choice. Again, it does bode well for us, but I don’t think it bodes well for the end user. First of all, we have long-standing, deep friendships at the engineering level. Of course, we do have similar relationships with the engineers of our other partners, but these relationships don’t go away.
When the market is fragmented, you are going to get consolidation. It is quite fragmented now, so you are going to get consolidation. The barrier to entry is high, so the people that are trying to pretend that they have climbed above that barrier to entry are now being put to the test.
Jim McHale, director of market research firm Memoori: Canon has a penchant for Scandinavian video technology having already acquired Milestone Systems, a leading supplier of open platform video management software. This combined the strength of Canon’s innovative imaging technology with Milestone’s best-in-class VMS. But many of the pundits thought it would not benefit either party long term. We can now see that this was the first piece in the jigsaw of building a world class video surveillance company to meet the challenge and demands of the Internet of Things (IoT).
For the last two years, the experts have been keen to point out that the Achilles heel of Axis is their inability to produce competitive products for the bottom end of the market and that this has slowed down growth and will continue to suppress sales. For the time being, going down the food chain to smaller buildings where IT Infrastructures are not commonplace and building operators lack the skills to realize the benefits of IP cameras is going to be a hard sell.
David Bunzel, executive director, PSIA: Canon has maintained a leadership role in imaging, especially in consumer and prosumer camera technology. Its acquisition of two leading companies in the video security industry, Milestone and Axis, adds to its commercial businesses and is a logical product line extension. Canon’s research and intellectual property is likely to add value to its security acquisitions and Canon benefits from security expertise and established distribution channels. Canon has also been a big proponent of standards. Considering that access control and identity management are likely to be valuable complements to Canon’s video offerings, the PSIA’s Area Control Specification and PLAI profiles are likely to be important in its future product plans.
Don Erickson, CEO of the Security Industry Association (SIA): The executives at Axis Communications, including Fredrik Nilsson and Martin Gren, have a strong history of supporting our standards, education and advocacy programs. SIA anticipates that Axis under the auspices of the Canon Group would have an even larger stage in promoting open standards and interoperability as well as training initiatives for video surveillance technology. We welcome the prospect of this acquisition deepening the involvement of both companies in the security industry.
