Change: Our Industry’s Only Constant
Regardless of what segment of the security services provider market you work in – from large, commercial systems integrators to small residential alarm dealers – one thing everyone can agree on is that this is an industry in a state of transition.
Things are changing in so many ways: market construction and consolidation; the rapidly evolving technology landscape; the entrance of new players into the marketplace; even the overall business structure of the traditional security dealer and/or integrator.
For integrators, hardware commoditization means the days of reaping healthy profit margins on the products themselves are nearing an end. For alarm dealers, the proliferation of do-it-yourself and smart home technology continues to alter the traditional RMR business model of monitoring contracts – so much so that it is effecting the overall valuation of RMR and security companies in general.
Change, of course, presents both challenges and potential opportunities for companies that are willing to embrace it. A good example is the rise of the cloud and the ability to capitalize on Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS) offerings.
The promise of more change is likely on tap for the security industry in 2018; however, depending on who you talk to, most agree that the upcoming year holds a lot of promise – especially with regards to the strong economy and the ongoing construction boom. Savvy security business owners must also be cognizant of some pitfalls to avoid falling off the pace in this fast-moving industry.
Check out a timeline of the biggest security business news of 2017.
2018’s Opportunities
Opinions vary widely among integrators as to what presents the single greatest market opportunity in 2018, but most of the responses we got can be boiled down to a few different schools of thought:
- Better leveraging of the Internet of Things (IoT) and big data;
- Broadening the scope of solutions and services offered; and
- Being prepared to take advantage of changes in the overall business landscape.
Leveraging data and the IoT: “The biggest opportunity in 2018 and beyond is helping customers convert their big data into smart data or actionable intelligence,” says Tony Varco, VP of Convergint Technologies’ Security Division. “Security has become a boardroom discussion, and is no longer considered simply a cost of doing business. Customers want to produce a return on investment that comes from harnessing the power of all the data they have available.”
According to Matt Zucker, President of Sales and a Partner at Beacon Protection, hopping on the IoT bandwagon is great way for integrators to build deeper partnerships with customers through the technologies they use every day. He says integrators who can sell customers on security products that serve more than one purpose in their businesses will be well-positioned to tap into new recurring revenue and increased product margins.
“Major retailers and technology companies will continue to develop tablets, smart televisions, connected home products and smart speakers, and it is our job as integrators to adapt these products/technologies into our own business strategies,” Zucker says.
Cybersecurity ushers in a new service offering: Jamie Haenggi, Chief Sales and Marketing Officer for ADT, says integrators who can establish separate, dedicated networks within organizations for security and business automation systems will find opportunities in the market. “Beyond just designing and installing these networks, managing and monitoring these networks for clients to proactively identify attempted data breaches is another area of growth for qualified security suppliers,” she says.
This new category of service offering, called managed detection and response (MDR), focuses on proactively monitoring and instantly responding to cyber-attacks rather than merely preventing them. These services will be in high demand in 2018 and in the years to come given the increased attention being paid to cybersecurity in general. According to research firm Gartner, by 2020, 15 percent of enterprise and midsize organizations will be using services like MDR, which is used by less than 1 percent of businesses today.
“Cybersecurity will have the greatest impact across all industries and play an important part in IP-based security products as well,” Haenggi adds.
Trump’s business-friendly policies: Carey Boethel, President and CEO of Securadyne Systems, says the GOP’s tax reform efforts will present a potential boon for the industry in 2018 – encouraging more discretionary capital spending and continued investment in new construction on the part of many businesses. “A decreased corporate tax rate will help strengthen balance sheets and increase the pace at which our economy is growing, which should benefit all aspects of the electronic security supply chain, including integrators,” he says.
Zucker says a tax cut would also enable integrators like Beacon to grow. “With the favorable tax cut, it will allow us to reinvest revenue into the organization to grow, create jobs, and penetrate potential markets more aggressively, while offering more benefits to our current staff,” he adds.
Smart buildings and cities emerging: Jim McHale, Director of UK-based market research firm Memoori, says growing integration between video surveillance, access control and intrusion detection technologies with smart building automation solutions also presents increased opportunity for integrators; however, it will require some additional work on their part to take advantage of it, such as acquiring new skills in applying software and network communications.
Additionally, Oliver Philippou, researcher for IHS Markit, says integrators can expect to find an abundance of work focused on securing public spaces moving forward.
“City surveillance projects that tie into Safe Cities/Public Safety initiatives are expected to increase significantly over the next few years,” he says. “This is being driven by Deep Learning analytics and the insight that they can offer, as well as an increased focus on back-end information and communications technology (ICT) equipment and the storage and management of the data being collected.”
Challenges Ahead
Although the market holds much potential, there are still plenty of challenges facing integrators in 2018 and beyond.
The race to the bottom: Integrators by and large recognize the fact that product commoditization is a reality that must be confronted moving forward – as the “race to the bottom” consumes the video surveillance market in particular.
“There is no question that there will be a continued commoditization of components, such as cameras,” Varco says. “Convergint has been fortunate to be able to counteract product margin erosion with a service-centric approach. The industry, and in particular integrators, need to strive for equilibrium between installation and service work by focusing on and developing higher-level advanced and professional services to mitigate the erosion.”
In an effort to combat margin erosion, Matthew Ladd, President of The Protection Bureau, says his firm has chosen to partner with surveillance vendors that seek to differentiate their products through enhanced features and streamlined integration rather than on price.
Boethel has positioned Securadyne as an integrator that can demonstrate value beyond product features and functionality in order to mitigate this trend. “Commoditization of security products is real and it continues to create margin pressure in our industry for both the OEMs and their channel partners,” Boethel says. “However, many integrators have done a good job of finding ways of preserving their gross margins by carefully selecting value-oriented customers and by demonstrating value in ways other than simply reselling product.”
Other integrators say they have felt little impact from the so-called price wars. “I agree that the video surveillance market has been flooded with more installation companies trying to undercut the competition; however, we have been able to maintain our video-based sales numbers,” Zucker says. “We can offset competitors who try to manipulate the pricing of potential projects via our sales process, education of proper installation, and most importantly, our reputation of superior work in the field.”
According to Philippou, video surveillance manufacturers are doing several things to offset the falling prices of cameras. One tactic is product diversification. Axis Communications, for example, has developed a perimeter radar solution as well as network speakers. Hikivision and Dahua – the two largest of providers of surveillance equipment in the world – are now offering access control and fire safety equipment, respectively.
Another strategy seems to be simply offering more lines of video products, as their demand is only expected to grow in 2018. “It is estimated that less than 10 million surveillance cameras were shipped globally in 2006...this grew to more than 100 million in 2016,” Philippou says. “We forecast more than 130 million will be shipped in 2018; however, the average price of cameras and other video surveillance equipment will continue to fall quickly, resulting in IHS Markit’s forecast that the world market will grow at an annual rate of less than 6 percent in 2018.”
McHale agrees that sales volume is key for manufacturers today, but he emphasizes that price is not the be-all, end-all consideration for every end-user. “Our report (visit www.memoori.com for more) shows that price is not king in the enterprise sector and that total cost of ownership (TCO) must be combined with reliable cybersecurity practices,” he says.
Vendor M&A: One of the most obvious but perhaps overlooked issues facing the industry is the consolidation of vendors and the integration of products and systems themselves. While 2016 saw what may be the high-water mark for security industry M&A in its history (see SD&I’s Jan. 2017 cover story, “The Year of the Giga-Deal”), 2017 saw the wave finally break and roll back – with only a few major vendor deals, perhaps the biggest being Assa Abloy’s acquisition of Mercury Security in September.
Still, Ladd says trying to stay abreast of frequent changes is no small matter in this industry. “One of the biggest challenges in 2018 will be the continued integration between manufacturers,” Ladd says. “Keeping up with software upgrades and integration API updates will need to be timely.”
Similarly, Zucker says that training technicians how to install and sell a diverse portfolio of technology solutions that are always evolving is another significant hurdle for the industry, and is something that requires continuing education from suppliers on a regular basis.
“Our ability to grow is dependent on finding suitable employees to help us extend our brand,” he says. “Of course, once you hire those apt people, you have the challenge of properly training the workforce.”
Technology Disruptors
The one constant security businesses can count on is the need to adapt to always-evolving technology. One trend or technology may be on its way out the door, but there is always another waiting in the wings to take its place. That said, the rise of new technologies often opens the door to opportunity, and it likely will again in 2018.
Everything “as a Service”: A prime example is the rise of cloud services. Though margins may be eroding for cameras and other security hardware, the increasing adoption of Video Surveillance-as-a-Service (VSaaS) and Access Control-as-a Service (ACaaS) offerings have provided integrators with a potentially more lucrative business in the form of RMR.
“Soon it will be Everything-as-a-Service (EaaS),” Varco says, “(but) the industry itself remains on the short end of a very steep curve when it comes to cloud-based services, and in particular Security-as-a-Service (SaaS). More and more of our technology partners are moving away from licensing pricing models to subscription-based models.”
While many were skeptical of the technology just a few years ago, it is now vital part of the solutions integrators provide. “We place a lot of emphasis on cloud – not just in SaaS, but also IaaS (Infrastructure-as-a-Service),” Boethel says. “SaaS provides a scalable solution with minimal up-front capital expense, which is great for middle-market companies that need security but lack the capital required for robust on-premises solutions.”
AI, drones and more: Among other technology trends integrators cite as potential heavy influencers in 2018 and the long-term include: artificial intelligence (AI), robotics and drones (unmanned aerial vehicles), cloud-based video storage, and even an increased focus on access control.
“Coupled with cloud-based storage, our fastest-growing vertical is our access control products and services,” Zucker says. “We have seen tremendous growth and interest from commercial clients to be able to limit access to physical space as well as seeing who is entering/leaving at particular times of day.”
Both Philippou and McHale believe AI will be the most transformational technology trend within the security industry moving forward. “Video already collects so much data that can’t be analyzed quickly enough by current software,” McHale says. “AI in all its guises can convert this into actionable data that will have an enormous impact on improving the TCO of video surveillance and IT convergence systems in all the verticals that make up this market.”
2018 Financial Outlook: Positive
A survey of Honeywell security dealers conducted by Capital One during the 2017 Honeywell CONNECT conference in November found a high level of industry optimism for the coming year in the security industry.
According to the survey, 86 percent of executives expect better financial performance in 2018, with only two percent predicting a worse performance.
“I think this confidence is, in part, thanks to a successful year in an industry that saw a significant amount of M&A activity and general growth,” says John Robuck, Capital One’s Managing Director of Security Finance. “Additionally, the rapidly evolving technology landscape is providing opportunities for companies to provide clients value beyond security.”
Of those surveyed, 38 percent cited interconnected devices as next year’s most impactful technology, compared to 28 percent last year, demonstrating the growing influence the Internet of Things (IoT) is having on the industry.
“In the coming year, I think these technologies will really have an impact on every aspect of how security businesses operate,” Robuck says.New lines of credit are projected to remain the most important type of financing for the industry in the next 12 months (as cited by 43 percent of respondents), but notably, 15 percent said leveraged buyouts (an acquisition funded in part by borrowed money) will be the most important type of financing to their business – a 50 percent increase over the previous year.
“Although new lines of credit continue to be the funding vehicle of choice for security professionals, the growth of leveraged buyouts may reflect an increase in M&A activity,” Robuck says. “We’re looking forward to an exciting year supporting our clients as they navigate this changing landscape.”
Smart Homes, DIY and MSOs: The Residential Market Trifecta
Add up all the changes to the commercial security industry already pointed out and they probably don’t hold a candle to the sheer amount and volume of change our industry’s residential security dealers are confronted with on a daily basis.
Evidenced by its new, powerful entrants, there is perhaps no hotter technology market on the planet than home security. Things have gone far beyond smart thermostats and voice assistants; in fact, 2017 saw the official entrance of Google (via Nest Secure), Amazon (via Cloud Cam and Cloud Key), T-Mobile (also via Nest), Best Buy (via Vivint partnership) and Bell Canada (via AlarmForce acquisition) into the home security market – and there are plenty of others.
Nearly all of the technology incursions are DIY solutions, although most if not all offer a professionally monitored option.
“Large companies and strategic players are offering DIY solutions to go after a large segment opportunity of the total available market that resides outside of the current home security penetration (approximately 20-25 percent), earned by traditional dealers over the decades,” explains alarm industry veteran George DeMarco, currently the Chairman of the Electronic Security Expo (ESX).
“Tackling this larger market potential has enough growth opportunity for both DIY and traditional security companies to be successful,” DeMarco adds. “Although the traditional security dealer is far from becoming extinct, DIY providers are forcing them to rethink their go-to-market strategies. Consumers have more options than at any time in history, and this means traditional dealers need to figure out how to deliver a powerful and low-effort experience for their customers.”
Renowned industry analyst Michael Barnes, founder of Barnes Associates Inc., a consulting and advisory firm for security alarm companies – which hosts the annual Barnes Buchanan Conference Feb. 8-10 (www.barnesbuchanan.com) – sees DIY as an opportunity for the industry.
“Any alarm system sale is good for the industry,” Barnes says. “The more end-users engage and learn about the features and capabilities of today’s technologies, the better. The DIY players are another group promoting the use of systems, and I think the relatively low penetration rate in the consumer sector is as much about a lack of sales and marketing effort on the part of the industry as it is a statement regarding consumer demand. Many of these products are good ‘gateway’ systems – that is, a low-cost, easy-to-access way to learn about the benefits.”
As much as smart home technologies have created a sizeable market entry opening for large players, they have also created a vast opportunity for most traditional residential security dealers.
“It appears that the capabilities (of smart home products) are getting ahead of the defined preferences of consumers – this creates plenty of opportunity for security dealers to continue their function of helping the consumer decide, and getting (and keeping) the system up and running,” Barnes explains. “The most successful players will be those that can take the capability and complexity and translate it into easy-to-understand, access and use offerings.
“It is interesting to see the configuration Nest chose for its latest offering – the focus is on friendly, usable, approachable technology,” Barnes adds. “Security dealers need to differentiate by emphasizing those aspects of the service that require more of an expert, personalized, and local capability in order to be most effective.”
Meanwhile, large MSO players (i.e., cable and telecom companies) on the services side continue to enter this industry – the latest being Bell Canada, which added more than 100,000 home security subscribers in November with its acquisition of AlarmForce. Another major player, Comcast’s Xfinity Home, reported its millionth residential security customer in April.
“While Comcast and Cox have had good success, Verizon and now AT&T have or are pulling out, so a caution flag is out for other potential entrants,” Barnes points out.
“I would think there are many large companies still looking at our industry,” says former ESA President John Knox, President of Life & Property Security Systems Inc. “On paper, the RMR looks good for business; the problem is it requires a lot of hands-on work to maintain. Mid-size and smaller companies still have an advantage in customer care and service.”
In all, it seems the traditional alarm dealer business is being assaulted from every conceivable angle. This is having both a positive and negative effect on M&A in the market, which is projected to continue in 2018.
“The drivers of the market – such as availability of capital, well-established consolidation synergies, strong industry dynamic and potential new entrants looking for a pathway into the market – are intact,” Barnes says. “There is plenty of liquidity, with buyers for those that want to sell, and sellers for those that want to buy. The number of deals being consummated in today’s market is driven more by the width of the bid/ask spread – sellers continue to expect and demand high valuations, while buyers are becoming more conservative.”
Paul Rothman is Editor in Chief of Security Dealer & Integrator (SD&I) magazine. Access the current issue, archives and subscription information at www.secdealer.com. Joel Griffin is Editor in Chief of SecurityInfoWatch.com.
