A panel addresses the crowd on Friday, Feb. 10, 2012, during the Barnes Buchanan Conference, a financial conference for the alarm industry.
Photo credit: (S. Lasky/SecurityInfoWatch.com)
As host Michael Barnes, partner in Barnes Associates, St. Louis, noted when he kicked off his presentation during day two of the 17th annual Barnes Buchanan Conference, the signs of a still struggling economy are evident. Tongue in cheek he pointed to the entrance of the host resort hotel The Breakers of Palm Beach, saying: “You can tell times are tough here in Palm Beach. Instead of a line of Rolls Royce’s parked up in front of the hotel, it is nothing but Bentley’s this year—shocking!”
Ironically, economic times for those attending this prestigious security alarm industry investment and mergers and acquisitions conference couldn’t be better, according to Barnes, who addressed more than 250 of the top C-Level alarm dealers and investment bankers in the country. The conference sponsors, Buchanan Ingersoll & Rooney and Barnes Associates, created this high-level event with the purpose of connecting buyers with sellers in what he and most of his peers view as a growing and dynamic industry.
“How is the industry doing? Luckily we are doing well. There has been encouraging and steady growth on the RMR side, which has offset some of the depressed numbers in the installation base,” related Barnes, who founded Barnes Associates in 1986 and directs the firm’s mergers and acquisitions activities. Barnes has orchestrated more than 230 security alarm company acquisitions to the tune of more than $11 billion in aggregate transaction value. “Capital is very supportive of this industry,” Barnes said.
Sound fundamentals keep industry strong
When asked why the industry continues to grow even in a down economy, Barnes insisted that it is because the basic business fundamentals on the industry are sound. He admits that even the alarm industry is not recession-proof, but it is extremely resilient. He stresses that the bottom line is that security alarm systems work and are a trusted service among the millions of customers who use them, and that support from insurance companies who incentivize their own customers to secure their homes and commercial establishments just lends credence to the argument that security is a stable business.
Barnes revealed the latest statistics on industry growth during the conference that painted an encouraging picture for future growth despite some immediate stagnation. Overall combined revenue in the alarm industry, including RMR (recurring monthly revenue) and installation totaled $43.9 billion in 2011—the same as 2010, with predication of a two percent or less growth factor for 2012. But revenue on the monitoring and service side did manage to grow five percent in the past year.
“The good news is that RMR is up. We lost installation revenue over the same time period,” Barnes said. But he pointed out that there are tangible reasons to explain the lack of recent growth on this side of the business. “With the lack of working capital expenditures over the last couple of years, installation growth has taken a hit. Customers are more likely to want to go with a lease option where they say: ‘I’ll pay more for monitoring services, but not on technology upgrades.’”
Attrition statistics go lower
Another interesting point Barnes highlighted is also a residue of the down U.S. economy. Attrition, which is the loss of monitoring customers among dealers, actually was lower than any time in the past several years. Why? Because many customers can’t afford to move or have not purchased new homes. This might be bad for the economy, but good for business, at least in the short term.
Barnes also cited major technology advancements as a major factor in the alarm industry’s steady productivity for its investors and owners. New technologies lower both service and maintenance costs, not to mention installation costs. Plus, evolving high-end security technologies like IP-centric video surveillance and access control are attracting both small commercial and higher-end residential customers. Again, all adding to the growing RMR model.
“I just finished reading MoneyBall,” said Barnes, the novel about the upstart Oakland A’s baseball general manager who used statistics and metrics to quantify the worth of his players. “A lot of those ‘metrics and quantitative’ data can be used in our industry. We are poised for growth, but we have had to up our game to provide potential investors reasons to get in the game.”
Yet as traditional alarm dealers and monitoring companies transition technology and service to meet the demands of a savvy new customer, there is an ogre under the bridge waiting to disrupt this rosy future. Thy name is cable providers!
Gearing up for this frontal assault are telecom and cable giants like AT&T, Comcast, Verizon and Time Warner to name a few. The battle plan here is to leverage their tens of millions of existing customers now receiving cable television, Internet and telephone services and seamlessly migrate them over to the security, fire and electronic home entertainment arenas.
While always deemed a potential threat simply based on their reach, most executives at the conference share Barnes’ feeling that these communication behemoths aren’t ready to make the leap quite yet.
“I don’t think the telecoms have an inherent advantage to make a successful move into this space. But you have to remember how quickly they went from strict offerings of entertainment to telephony packages,” he said. “The big issue these large cable and telecom companies are going to have as they try to leverage their base is whether there be the kind of EBITA most of their boards will require to satisfy the shareholders. They have a history of throwing a lot of money at ventures like this failing to see them pay off enough to stay the course.”
In the end, Barnes and his colleagues agreed that the continued infiltration of larger new players into the alarm industry is good for business. He contended it demonstrates the overall health and vibrancy of security as an investment.
Steve Lasky is the publisher of SD&I magazine and the group publisher/editor-in-chief of Security Technology Executive magazine. He can be reached at firstname.lastname@example.org.