In preparation for our annual Barnes Buchanan Security Alarm Conference last month we worked with Security Dealer & Integrator magazine to survey companies that acquire security alarm accounts under a Dealer Program. The goal was to look for additional signs of acquisition activity in the industry during the last several years, while the economy slumped and the capital markets went into a tailspin. We were surprised at the level of activity, to say the least.
It was well known that ADT and Monitronics had grown their programs materially, that Broadview (formerly Brinks Home Security) had pushed forward, and upwards of 10 others were operating programs--but the totality of this activity had not been quantified-until now. The accompanying chart (on page 37), compiled independently by my inquiry to each of these companies, summarizes the results of the survey, which includes data from all of the major players. We selected these players based on their size and were pleased to receive 100 percent response from those companies we asked to provide this information.
As indicated, the number of accounts bought/sold under dealer programs in the U.S. for 2009 was 722,000 and the volume was up 14 percent from 2008. These are big numbers. In order to put them into context, contrast this activity with the pending sale of Broadview to ADT, a major event in the industry by any standard. Broadview has $40.5 million in recurring monthly revenue (RMR), over 1.3 million subscriber accounts (second only to ADT), and is over one and one-half times larger in RMR than the next largest player, Protection One. Broadview is also over 25 years old. The volume of accounts generated and sold under dealer programs in the U.S. for just 2008 and 2009 equals almost exactly the size of Broadview!
Not your father's program
It is clear that these programs have come a long way. Gone are the days of dealers creating accounts and simply submitting them to "the market." The pendulum has shifted to a much closer and tighter relationship between the buyer and the seller, on a longer term basis, with a much higher level of control in the hands of the buyer. Branding, pricing, credit score minimums, contract forms, equipment used and geographic focus are all typically coordinated, and the multiples paid for accounts are stratified along several variables that define the quality of the account. The result is much more of a partnership between the buyer and the seller, with tighter contractual relationships and a closer alignment of interests.
The level of sophistication in handling the mechanics of the relationship has also significantly evolved. For example, Security Networks, the fourth largest player in the space by annual volume, has a state of the art system for processing purchases that is highly automated, Internet-based and designed to move the process along quickly and accurately. Everything is designed to make the sale and customer boarding process seamless, and to inform both Security Networks and the originating dealer of the status of each account along all of the critical variables. Their purchases were up over 100 percent in 2009.
A natural division
Dealer programs have evolved principally due to three forces that influence the security alarm industry. First, there is a natural dividing point between the creation of a new alarm account, through the selling, designing and installing of a system, as well as the ongoing monitoring and maintenance of the system. Aside from some similarities of system installation and field service, the two processes couldn't be more different. The critical competencies required to manage a large, modern day central station and back room operations, with significant economies of scale, are very distinct from those required to manage a competitive sales force coupled with design and installation capability, often spread over a large geographic area. As a result, a natural bifurcation of the business has occurred with a good portion of the industry specializing in only one of these processes. Dealer programs allow this to happen more efficiently.