Features Research
Why security start-up numbers are soaring: IHS Markit analysis

For example, global DIY intrusion equipment market revenues are forecasted to grow at an average of nearly 20 per cent per year from 2016 to 2021, according to data from the Alarm and Monitoring Intelligence Service.

Why is this happening?

Finding an original equipment manufacturer (OEM) has never been so easy. A number of affordable options are available online with reasonable minimum-order requirements (MOQs), from websites such as 1688.com or Alibaba.com.

While making products in Asia is not new for the security industry, sourcing it online is.

In the past, to manage the balancing act of affordability vs. quality vs. the risk of patented technology being stolen, Western companies required assistance or an outright local presence.

Now, with the help of review systems, virtual factory tours and third-party quality assurance services, an increasing number of Western suppliers believe it is no longer necessary to visit their factories in person.

Lower MOQs make it possible for smaller companies with limited budgets to bring a system to market, and allow companies from other industries to test market demand with less potential downside.

The OEMs’ stock offerings have improved dramatically — even five years ago, a large proportion of these suppliers specialized in producing a narrow range of product types to “win the race-to-the-bottom on pricing.”

As the OEMs have grown in size, their ranges have widened, and now prospective western buyers can commission a full security system, including its own basic mobile application.

Additionally, innovation increasingly comes in the form of software and services rather than hardware, which is easier to attain than security hardware innovation, with the exception of the cost of hiring developers.

Funding is also easier to come by as crowd-funding platforms provide prospective entrepreneurs with access to potential investors. These funding opportunities encourage new market entrants and give companies a better chance of surviving their early years.

There is also an increase in demand for DIY security. The popularity and affordability of “plug-and-play” wireless security devices has grown over the past five years, and the higher price of devices and a challenging installation have become less of an issue for consumers. This is important for two reasons:

1. Suppliers aiming their products at the DIY market typically have fewer requirements to meet before they can start selling.

2. As the DIY market becomes a more viable source of revenue, more companies will become willing to invest in it, which then increases the number of new players.

How will this affect traditional security providers?

One concern for traditional security providers is that in the residential consumer security space, innovative solutions can accumulate market share quickly. The easier it is to bring a new security system to market, the greater the probability that a new company will emerge next year and do the same.

Lower market entry costs also mean that current market leaders have to be more wary of copycat solutions.

As the number of competitors increases, suppliers find it increasingly difficult to differentiate themselves. This often devolves into more aggressive price competition, which current market incumbents should eventually win due to their greater economies of scale.

Another potential concern for current market leaders is the growing strength of the OEMs in Asia: as they grow, they will eventually start selling direct to Western markets. They present a unique threat because of their ability to undercut market leaders on prices.

Remaining challenges for security start-ups

Despite the growth of security start-ups, consumer-grade security market revenues remain dwarfed by that of the professional security industry. For example, the DIY market accounted for only 2 per cent of global intrusion equipment revenues in 2016.

Consequently, for the for the foreseeable future, professional security players that are also active in the consumer space will continue to enjoy the advantages of lower production costs and larger marketing budgets.

Furthermore, the retail brick and mortar sales channel remains closed to smaller players. Unless the supplier can prove itself through consistently outstanding market demand, it has little chance of becoming a large big box retailer.

Finally, interoperability is becoming a key consumer concern. Consumers are now more wary of purchasing products that will not be able to integrate with their existing security/smart home devices. Future start-ups will need to allocate additional developer resources to ensure their systems are open as soon as possible.

Jim Dearing is a senior analyst, building and security technology, IHS Markit.