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More rumblings in the residential market

Something is going on in the residential and small business alarm market. Let’s look at some anecdotal evidence pertaining to these markets — some of which was addressed during the Barnes Buchanan annual conference, held in February — keeping in mind that the U.S. and Canadian markets are not the same.

• Monitronics, a large U.S. dealer based residential and SMB alarm company, went through a complete financial restructuring about a year ago.
• In the U.S., the DIY market is reputedly growing at a rate of 20 per cent per year right now — huge growth which is eating into the professionally-installed market. Many of these new DIY systems are being monitored. There is far less data available in Canada but at the moment, it appears that DIY is not nearly as popular here as in the U.S.
• In Canada, I am getting more calls from dealers these days asking about an exit from their monitored accounts and the most common reason is the increasing influence of the telcos like Telus and Rogers. These dealers say they just cannot compete.
• Buyers in Canada who have normally been very keen to buy any kind of monitored ac- count are now being much more discriminating.

I don’t think this means that those in Canada owning residential and SMB monitored accounts should panic. However there are several forces at work in this market that make doing business there more difficult for professional alarm dealers:

• Alarm dealers cannot afford to let their customers sit with old technology anymore like they used to be able to. If they don’t offer to upgrade them, a cable company will come along and do it for them.
• In Canada, more so than in the U.S., there has been some pushback on the ever higher and higher monitoring rates being thrust at customers. Although most residential alarm customers accept the need for cellular and a sizable number like the interactive features offered today, they don’t want to pay $60 a month for these services. So there is a move to higher install fees and lower RMR rates. The telcos have realized this and are offering these services for much less.
• Just staying up to date on new technology today is more time-consuming for an alarm dealer. And this technology can be expensive. It is much more difficult for an alarm dealer to offer a basic system for free when the panels cost twice what they did 10 years ago.
• As mentioned, DIY has arrived in the U.S. and will soon come in more force in Canada. Although it is helping to expand the overall market for alarm systems, I don’t think it is helping the average Canadian alarm dealer.
• In terms of buyers, there are fewer buyers of alarm accounts in Canada both for smaller blocks of accounts and even the larger platforms companies. Private equity is more interested in fire and integration companies these days.
• Multiples for blocks of accounts have fallen off somewhat. ADT’s 500,000 accounts sold to Telus for 33X ADT’s RMR.

I cannot over-emphasize the impact that the major telcos have had on the alarm market recently in Canada — much greater in Canada than in the U.S. If you look across the country, all the best deals for new interactive panels are being offered by the telcos — Rogers, Bell, Telus and Eastlink — and these are almost all deals that an independent cannot match. In addition, the telcos are using their marketing power so that any new customer in Canada will likely go to a telco first to get a quote.

So what effect does all this noise have on the market for alarm accounts? Here is my take. Residential/SMB accounts are not in as much demand as they used to be. It is becoming much more difficult to sell small blocks of accounts, i.e. less than 250 accounts.

Secondly, gone are the days that dealers can get away with trying to sell alarm accounts with- out signed contracts. Buyers want that waiver of liability on the back of the contract.

I am constantly surprised at how many dealers don’t have signed contracts. Trust me on this. The buyer does not care if you ran your business for 30 years without signed contracts. They don’t care if you relied on your liability insurance. They want contracts. So get at least a one-year monitoring contract signed now.

Next, buyers want accounts that are on call forward lines. Otherwise the dealer will most likely have to move the accounts to the buyer’s station before they get paid. These are the top three issues when selling accounts: size of the base, signed contracts and accounts on a call for- ward line. When you add up what’s going on day by day in the residential market and the increased difficulty in getting deals done at multiples done in the past, it makes for an all round much more difficult story in the residential, SMB market.