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10.2.19 – SIW –

What’s next for the security industry? 3 trends to watch for in 2020

No industry stands still—and the security industry is no exception. That is why it is important that security dealers track the technological, financial and competitive trends that will shape the security industry over the next 12 months. They include a host of new products and services brought on by the quickening pace of technological innovation, a shift from one wireless standard to another, and the entry of new competitors, especially on the residential side of the business, that has created a pause in the steadily rising company valuations.

Although the outlook for the remainder of 2019 remains positive, it only makes sense, after a decade of economic expansion, to take steps now to address these trends and place your company in the best possible position to weather whatever the future will bring.

Responding to a Stream of Emerging Technologies

The pace of innovation in security technology has rarely reached this level—and for dealers these changes represent a real opportunity, especially in the commercial market. An obvious example is video analytics coupled with machine learning, which has the potential to significantly reduce monitoring costs by enabling individual technicians to track more cameras. Thanks to pattern-based video algorithms, monitoring systems with video analytics can pull those screens displaying suspicious activities from a bank of displays. The addition of machine learning, which finetunes the underlying algorithms over time, can generate cost efficiencies and lead to a dramatic reduction in false positives.

Video analytics also sets the stage for more effective real-time video verification, providing alarm companies the option of sending a silent alarm to law enforcement agencies rather than setting off an audio alarm. In other words, security dealers can go beyond simply discouraging intruders to giving law enforcement agencies the opportunity to apprehend them. Not surprisingly, police departments as well as customers find video verification extremely attractive. Real-time video verification has residential as well as commercial applications.

Ubiquitous broadband sets the stage for a final example of a technology that is attracting interest: cloud-based access control. Because it does not require extensive on-site hardware and related upfront costs, cloud-based access control has made it possible for security dealers to offer access control to owners and managers of smaller facilities.

Cloud-based access control and video analytics are just two examples of alarm technologies that can be integrated into enterprise management systems to improve operations. This is perhaps the most transformative change that the security industry has experienced in decades. For instance, video cameras used for security can help retailers heat map their businesses, enabling them to determine how customers travel through their facilities. They can then use this information to optimize their store layout.

Right now, just a small portion of the data alarm companies generate is being applied for security purposes. Seen in the context of business intelligence, it is all potentially valuable. For security integrators working with larger or more sophisticated companies, this is a huge opportunity.

Managing the 4G Transition

Nothing lasts forever, especially in the world of wireless communications. As security professionals know, Verizon, AT&T, and other wireless providers are moving away from 3G networks, gradually reallocating bandwidth to 4G LTE. Currently, Verizon plans to turn off 3G on December 31, 2020, while AT&T has extended its 3G retirement date to February 2022. The other carriers have yet to make a specific announcement, but it is generally agreed that it is just a matter of time before they do.

The challenge for the alarm industry is replacing the millions of 3G radios embedded in their systems with faster, more robust 4G LTE devices. Because the wireless companies are already cutting back on maintenance on existing systems, the sooner dealers start getting in front of the transition the better. Getting a jump on this transition will not only reduce the risk of service interruptions but also spread out the cost of service calls—expected to average about $200 each—over a longer period.

This cost, however, may not be as high as security companies might first imagine. Jim DeVries, President and CEO of ADT, notes that not every upgrade will require a special visit. In his second quarter 2019 earnings call, he estimated that half or more of replacements could be conducted in the course of providing another service.  Others have been less optimistic and anticipate material costs associated with the transition.

The industry went through a similar transition before when it switched out 2G radios in 2016—and it has learned a few lessons about how it can minimize attrition and even upgrade services.

One tactic is to use the occasion as a chance for security technicians to review the customers’ systems and recommend specific upgrades. Here expertise in new alarm technologies—and not-so-new technologies depending on the age of the customers’ systems—can prove valuable. Installing a more capable alarm system, integrating alarm with home automation technologies, or even adding new doorbell cameras can help offset the costs of the service call.

Adjusting to a New Competitive Landscape

There is no doubt about it: the security industry has been good to most dealers, and it is one that has proven to be a strong performer even during economic downturns. Over the last few years, many dealers have reported growth rates in the 20 percent range, although that growth has not been uniform across the industry. Those companies that logged the most substantial growth were those who were able to capitalize on innovations in security solutions to strengthen the value proposition for end customers, both residential and commercial, and create new sales channels. At the same time, the alarm industry, like other sectors, has benefitted from a solid economy.

Companies from adjacent sectors have taken notice. Multiple system operators like Comcast, tech giants like Google and Amazon, and companies with do-it-yourself (DIY) offerings like SimpliSafe have all entered the market—and launched a series of products that compete directly with traditional offerings, especially for residential customers. Traditional alarm companies are facing competition from Amazon’s Ring, Google’s Nest, SimpliSafe’s wireless systems, and Xfinity Home Security.

The appearance of entrants from adjacent industries has not so much clouded the future of the alarm industry as complicated it. One result is that it has caused valuations to be, at least for the moment, more difficult to predict. For alarm company executives looking to make an acquisition, more modest valuations may mean securing slightly better deals than in the recent past, while sellers with a limited time horizon would do well to recalibrate their expectations accordingly.

Eventually, the growth in valuations should resume. The extensive marketing new entrants have undertaken indirectly benefits the entire industry, elevating awareness of the importance of security and spotlighting exciting new residential and commercial products that can deliver higher levels of security and intelligence. As a result, more and more customers see security not as a luxury but as a necessity. They are also seeing security as a foundational element in a larger context: home automation for residential customers, business intelligence for commercial ones.

In effect, new entrants may be growing the pie—and alarm companies have a number of advantages that will help them maintain or expand their share. They already have a generally loyal client base — and they know the business and the technology. Google and Amazon have built their businesses on identifying individual preferences and tastes while offering commodities to satisfy them. Understanding local commercial codes and their implications for security for a specific site is a much harder problem to solve.

Keeping Abreast of Change

By any standards, the prospects for the alarm industry are exceptional. A survey by Imperial Capital, for example, estimates that the number of U.S. households with a security system, will jump to 63.1 million by 2024, up from 32.7 million in 2018. Nonetheless, security dealers cannot afford to be complacent.

Our industry will change dramatically over the next year as it absorbs new technologies, new business models, and new entrants. Companies that are able to keep pace, stay informed and adapt their business models accordingly will succeed. This means providing higher-value technology to their residential and commercial customers, putting plans in place to actively manage the transition from 3G to 4G LTE, and rebalancing their portfolios to place more emphasis on commercial opportunities in the face of new entrants in residential. Companies failing to make these changes run the risk of falling behind as the industry moves forward.

About the Author:

John Robuck is Managing Director of the Security Finance lending practice within Capital One Bank’s Commercial and Specialty Finance business.