Time and targets
By Linda Johnson
In the two decades since the first issue of SP&T News was published, the security industry has seen immense change, brought about by new ideas, new products and new people. While some of these changes could be seen coming, others took everyone by surprise.
By Linda Johnson
To mark SP&T News’ 20th anniversary, leading market and financial analysts look back to some notable past predictions and try to assess how the forecasts fared — whether a prophecy about a new technology was bang on or completely missed the mark; whether it over-estimated or under-estimated a trend’s impact; and whether the reality, if it ever came, lived up to expectations.
The next big thing(s)
Early predictions that IP technology would immediately take off and go on to have steadily increasing growth were somewhat off the mark, says Chris Peterson, principal owner of Orlando, Fla.-based Vector Firm.
“It did something like the shape of a hockey stick: adoption didn’t happen that rapidly in years one to five. However, in the latter years, it changed rapidly. So if, in 2002, they had looked ahead to 2008, they would have thought, ‘We sure were wrong.’ But in the last five or seven years, it’s all caught up. That’s similar to a lot of changes in technology.”
The transition from analogue to IP, he says, was slower than expected partly because it was difficult for salespeople to adapt to the new requirement of selling product to the IT department.
“It was easier for them to gravitate back to analogue technology because they understood it and they understood how to talk to the facilities manager. No matter how much training they had in IT, they didn’t feel comfortable talking about it, especially to an IT person.”
In the late 1990s, another technology that would change the industry, home automation, was widely seen as the next big thing, recalls Will Schmidt, managing director, security lending group, at St. Louis, Mo.-based CapitalSource. The systems, many based on X10 or hard-wired technology, never took hold in the broader market to the extent expected.
Recently, of course, home automation — with technologies such as Z-Wave and Zigbee — has enjoyed a much wider acceptance, he says. “The prediction of home automation taking off and being a big component of the industry was right. We just made the prediction 15 years too early.”
Analytics, too, has made more than one entrance. Hotly anticipated 10 years ago, the new technology soon faded out, says Jeff Kessler, managing director, equity research, at New York, N.Y.-based Imperial Capital.
“Analytics way overpromised their capabilities, and within three years, a lot of companies had dropped them, or most of them, from their quiver of security. We did not expect that analytics would be so imperfect and that the major companies who were claiming they could do a lot of different things would fail at so many of them,” he says.
But fast forward to the last two years, he says, and analytics have come back — now much more accurate and more focused on given tasks. “Analytics on the commercial side have now been honed to a point where they can be used for security. So a lot of companies who had no faith at all in analytics are jumping back rapidly into using them.”
Lock and keep
Two segments of the industry that have changed dramatically during the last two decades are the lock and guarding businesses, Kessler says. Twenty years ago, guarding was a pure “volume” business: who could get more bodies out; who could bid a job lower. Guard companies had operating profit margins as low as 3 per cent.
“We did not expect 20 years ago that either the lock or the guard business would ever be more than a commodity.”
Over the last five years, however, large guarding companies have been acquiring technology-based systems, giving guards a new ability to provide and analyze information. The lock business has seen a similar transformation. Technology and consolidation have made it a $15- to $20-billion business, Kessler says.
“The major change in the lock industry has been the incursion of electronics and remote wireless electronics, which we were not looking at 10 or 12 years ago. It is now about 20 per cent of the industry and will someday be 50 per cent,” he says.
One shift that proved slower than expected is consolidation in the security products market, says Kevin Lonergan, senior analyst at Toronto-based IDC Canada. Today, many point products still offer very specific types of security, such as identity management, web, messaging, endpoint and network security.
“For an organization who’s dealing with two dozen different security vendors across their servers and network infrastructure, it’s hard to manage and it’s very expensive. We have seen progress over the years,” he says. “But we still have a long way to go to get full-security solutions across multiple platforms.”
In the early 2000s, Schmidt says, new players were entering the U.S. security market. The RBOCs (regional Bell operating companies) started consolidating and acquiring companies, and there was an expectation they would soon be a force to be reckoned with. This prediction proved wrong: in the end, the telcos sold out and left.
“But now, here we are, in 2016, and it’s Groundhog Day,” he says. “The MSOs are coming into the industry. This time, they’re benefiting from better equipment technology. They seem to be having a bit more success this time, but it’s still early innings and hard to know how exactly what will come of it.”
A completely unforeseen development on the competitive front, driven by improved technology and the rise of direct marketing over the Internet, was the prevalence of DIY and the scale of some DIY platforms, Schmidt says.
“We expected DIY would be limited to only the most technically proficient segment of the customer base. We didn’t expect there would be large, specifically DIY alarm businesses at the scale they are today. There are companies that have done very well in that market,” he says.
Faster than anticipated
In 2005, when the total size of the video surveillance market was $4.9 billion, IHS forecast that by 2010 it would be worth $8.1 billion, says Jon Cropley principal analyst, video surveillance, at London, U.K.-based IHS Markit. According to the actuals, the market in 2010 was in fact worth $9.6 billion.
“Between 2005 and 2010, the market grew faster than we were expecting. We were saying it would almost double; it actually came very close to doubling.”
In 2010, the firm forecast the video market would be worth $17.2 billion in 2015. In the event, it was worth $14.9 billion, he says. “You have the opposite trend. The market didn’t grow as fast as we were expecting.”
Cropley says two factors slowed growth: the global economic downturn of 2008–2009 and lower average product prices. The lower ASP of a network camera (which went from almost $490 in 2010 to under $130 in 2015) was partly the result of the entry of Chinese vendors into the market. The top three vendors in 2005 were Panasonic, Pelco and Bosch. By 2015, they had been replaced by Hikvision, Dahua and Axis.
“That was another big difference, something the industry did not anticipate: the power and influence the Chinese vendors would have,” he says.
One long-delayed improvement in information protection, which people are still waiting for, is mandatory breach notification regulations, Lonergan says. Although the 2015 Digital Privacy Act brought changes to PIPEDA (Personal Information Protection and Electronic Documents Act), and the changes included mandatory notification, the regulations around mandatory breach notification have not yet been finalized.
“We’ve been expecting it and hearing about it for a long time,” he says, adding data breach reporting is currently voluntary. Thus, there is little incentive for companies to report a breach.
“Hopefully, when we finally get this mandatory breach notification, there will be fines set by the government that are high enough that it will be an incentive for organizations to disclose this information.”
The business of security
David A. Stang, founder and president of Chicago, Ill.-based Stang Capital Advisory, points to two past predictions about the industry that would end up exceeding expectations. The first was that bank lenders for the security industry would remain stable.
“The thought was that there would be lending available to the industry. The answer is: ‘Yes, and even more so,’” he says, adding the reasons are threefold.
First, more banks are lending to the security industry today. “The core group are still there, and there are more of them because certain individuals have moved on to new banks. And other banks have become more comfortable lending to the security industry.”
Second, the “non-banks,” the non-regulated funds, that lend to the middle-market industry have become more comfortable with recurring revenue businesses, which benefits security companies. Finally, he says, public debt markets have begun to understand the industry, as demonstrated by the public debt of Monitronics and Vivent.
Regarding the second, more general, prediction, Stang says, the industry came through the last recession better than expected. Attrition on the residential side did not change that much through the downturn. Although attrition did increase due to financial stress, the number of moves — the main reason for attrition — was down. So people tended not to cancel.
“The concern was that consumers would have a lot of financial stress and would cancel their residential alarms because they didn’t think it was necessary. I don’t think that really came to pass,” he says. “The industry showed that it is recession resilient.”
Where it can go wrong
Tricia Parks, CEO and founder of Dallas, Tex.-based Parks Associates, says there are several reasons predictions go wrong. One cause is “environmental disruptions,” events no one can foresee, such as 9/11 and the mid-2000s recession; other times, predictions are simply unrealistic. Some forecasters, for example, predict much higher growth than is likely.
“For really significant growth, the value proposition needs to change. Such a major value proposition enhancement was the addition of smart home adjacencies to security,” she says. “But such changes don’t happen every day. They happen once a decade.”
Often, she adds, predictions misfire because they are based on flawed assumptions. Many people, for instance, asked what their top concern is, cite the security of home and family. But that doesn’t mean they will go out and buy a security system.
“There are all sorts of solutions that people take on to be secure. They could move to neighbourhoods where crime is low or move out of neighbourhoods where crime is high. In the U.S., they could buy a gun. Or they could just go out and get a dog,” she says.