AT&T’s impact on the residential security market

Telecommunications giant AT&T earlier this week formally announced that it is entering the home security and automation market with its "Digital Life" services. In addition to offering traditional alarm system features -window and door sensors, smoke detection, and motion and glass break sensors - the Digital Life portfolio also includes the integration of modern home automation technology including thermostats, moisture detection and appliance power controls.

According to Kevin Petersen, senior vice president of Digital Life for AT&T mobility, the company has been looking at getting into home security for a while and believes that the industry is ripe with opportunity given the evolution of wireless technology and the ability to control systems remotely with mobile devices.  

"We felt that advancements in technology had progressed enough in terms of stability, reliability and cost-effectiveness. If you look at the adoption of smartphones and tablets and consumers’ attitudes and willingness to use these in their everyday lives, we felt the timing was right," explained Petersen.

Petersen said that AT&T also conducted research and found that many companies in the industry were relying upon old technology and that consumers were unsatisfied with the current set of features and functionality available in the marketplace.

"People wanted to be able to use their system to do more than what they’re able to today. They also wanted choice, value and transparency and a solutions orientation that, at least from our research, they weren’t finding," he said. "And then lastly, our brand played well. It really played well with consumers in terms of them seeing us as a likely choice for this type of service. In terms of a natural fit, we just felt like it was a real extension to what we do."

AT&T has built two all-digital monitoring centers in Atlanta and Dallas where the company plans to begin trials of the service this summer. Petersen said that the company will have "dedicated partners" that are licensed install the systems and their associated components to ensure that they are installed right the first time.

Additionally, Petersen said that AT&T would be using a "first-of-its-kind" integrated controller in homes containing a 3G module that can communicate with their monitoring center wirelessly, as well as through a wired broadband connection. The controller will also operate on Wi-Fi and control home devices that utilize the Z-Wave communications protocol.

"We think it’s going to be a game changer," he said. "We think it really does give value choice and peace of mind and control to the consumer, which we think will not only allow us to compete effectively for customers that buy the product today, but will hopefully will help us expand the market."

While the alarm industry successfully lobbied against the entry of telecommunications companies into the market in the 1980s, Bob McVeigh, chairman of the Electronic Security Association’s industry affairs committee and vice president of Norwalk, Conn.-based Security Solutions Inc., said that the industry is much different today than it was then.

"This is not something new to AT&T. They have tried (home security) one or two times before… but I think they’re of the ilk if first you don’t succeed, try, try again and I believe the climate now is considerably different from what they’ve tried in the past," McVeigh said. "They’ve got a real shot at making this one successful for them and their business and I believe they’re going to be successful in this effort."

According to Jeff Kessler, long-time security industry analyst and managing director of Imperial Capital, LLC, many of the telcos initially attempted to make a foray into just the home security market about 10 years ago, but they didn’t generate a lot of earnings and most of them eventually sold off their security assets. Over the last two to three years, however, Kessler said that much has changed in the market, including a willingness by consumers to start adding things besides security to their home security systems including cellular backups, personal emergency response system (PERS) capabilities and video surveillance.

"Given that the incremental cost for a cable or broadband operator like AT&T  to add new services  to what they already have in turning the triple play into the quintuple play, the types of financial blocks that they ran into 10 years ago have been mitigated dramatically," Kessler said. "And, in turn, the value proposition to the customer is also much greater now because they can do a lot of things with their home security services or systems to make it a worthwhile system rather than a negative sale. Now, people are being marketed differently, whether it is from ADT, their competitors in the industry or whether it’s from the big carriers and they’re saying that it isn’t just a matter of security anymore."

In addition to being able to offer security and home automation as an incremental cost, Kessler said that the accounting for telecommunication and cable titans has changed for the better in that senior management is not being pressured by shareholders over the initial loss that it used to take to gain a security customer being that security can now be added as just another service. Kessler also believes that the competitive landscape has changed.

"Up until now, one of the things that has held guys like AT&T back from really trying to market these services is the very negative branding or response that many existing users have to the carriers. When someone tells you that they’re going to show up at your home in a week, sometime between the hours of eight and five, that doesn’t cut it when you have either a security issue, which has to be dealt with immediately, or you have a healthcare issue, which not only has to be dealt with immediately but over a long telephone call… and the barriers to that are breaking down," Kessler explained. "Given the amount of dollars that AT&T is prepared to spend and we don’t know what that amount of money is, but the budget is obviously in the many, many millions of dollars and that Comcast and Verizon are already spending in tests, it’s clear these companies believe they can take some share from the existing alarm companies and the existing dedicated personal emergency response players and the existing dedicated home services companies, many of whom are pricing themselves out of the market anyway."

McVeigh believes that the adverting dollars that will be put behind AT&T’s security offering, as well as the ones from the other communications companies like Comcast and Verizon, will create awareness among consumers about home security and will thereby increase the market for everyone.

"These companies are going to severely punch into that to bring that penetration rate up and that’s going to benefit everybody because now you’re going to get customers that are well aware of these new technologies that are coming out," McVeigh said.

Kessler agrees that these marketing dollars will increase awareness of home security and automation in general and that the market, which has remained relatively stagnant between the high teens to low 20s in terms of the percentage of homes in the country that have a security system, could potentially double over the next five to eight years.   

"My conclusion to you is that the amount of dollars spent on marketing this area, on the part of everybody, is going to increase… the effective market and that we could get to 35 or 40 percent penetration of American homes using these services in the next five to eight years, which is again almost double what it is now. That is enough to provide AT&T with a lot of success, even though they may not be taking customers away from ADT. The rising tide will help all ships here."

Both McVeigh and Kessler agree that innovations in technology have reduced some of the market entry barriers that faced telecommunications and cable firms just a few years ago.

"I think all of those providers have learned a lot over the years and I believe now the equipment itself has improved dramatically since when they were in the market before," McVeigh explained. "They were dealing before with a hardwired scenario, which made it very labor intensive and the upkeep was considerably different than it is now. The onset of wireless technology has become so stable now and it’s much easier to get in and out."

The much bigger issue, however, according to McVeigh, is how the entrance of AT&T and other cable and broadband providers into home security is going to impact smaller, independent security dealers and even some of the larger players in the space. He believes the challenge for some companies will be migrating to these newer automation capabilities that residential customers are clamoring for and understanding that the industry itself has changed.

"The independent dealers are going to have to realize this isn’t your father’s alarm company anymore. Things are changing," he said. "Technology has moved and allowed these companies to come in, specifically the Z-Wave technology that has brought automation and control into the homes. Customers are now going to demand it. They’re going to see this stuff coming out, they’re going to see this advertising and if you’re not on that bandwagon and you’re not offering the products that these other companies are offering, you could find yourself left in the dust."

Where McVeigh said smaller dealers can differentiate themselves is in the level of customer service that they can offer.

"There is a definite void. The larger companies are going to be looking towards this wireless technology and try to get the quick in and out, which is nice, but it’s not all encompassing," he said. "There are a lot of customers out there that are going to want a more specialized, a more custom, and a more concierge-type feel to their installation. This is where these smaller companies are going to fit nicely into it and if they grasp that and take hold of the ability to go in and individually customize these systems for these customers."

Kessler said that although the telco and cable firms obviously have the capital to challenge the biggest companies in the industry, they will face the quandary of getting customers of these established dealers like ADT and Protection 1 to leave those companies who they’ve trusted for years.

Jim Callahan, president of Atlanta-based Ackerman Security Systems, said that he’s seen a number of companies enter and exit the security industry during his 32 years in the business and that how AT&T will fair in the space remains to be seen. However, he believes that since their entry into the market is more technology driven with the utilization of iPhones and iPads to control a myriad of home devices, that they may have more staying power than previous entries by telcos who entered the industry will just a pure security play.

"In my opinion, at the end of the day, it’s going to come down to execution and that’s where these types of companies have failed. That’s been their Achilles’ heel," Callahan said. "I mean let’s face it, the consumer’s general perception of phone companies or cable companies is pretty low. They’ve been the butt of jokes on Saturday Night Live now for probably 25 years. I don’t think the security industry is doomed. I believe we are all going to benefit from what’s going on. What I think will be an interesting thing and what we need to watch is what level of success these companies can generate in the short term."  

Though Kessler indicated that accounting for many of these large cable and communications firms has changed, Callahan said that because companies usually have to take a loss on installing security systems and equipment before they recoup that money in RMR over time, it will also be interesting to see how that plays with the company’s management and investors.

"Initially that depresses earnings and the whole reason I think they’re getting into this is to find ways to improve earnings so they seem to be diametrically opposed," he added.  "The question will be will they be able to keep their boards and their shareholders happy while this is going on?"

One of the things that Callahan said his company has been focused on is educating their customers and the markets they serve that they also offer the services being touted by AT&T and others.

"I think the challenge will be for dealers who make the mistake of just sort of ignoring this," he said. "If an end user who is interested in these types of  things -video, locks, lighting or energy savings - understands that a security provider offers these things, at the very least I believe they would make a comparison between what is being offered by the cable company or phone company and at the end of the day, because of the uphill that these organizations have with a perception of their service, many people will select their alarm provider because they are accustomed to that more hands-on, close relationship."

Brad Glore, past president of the Georgia Electronic Life Safety and Security Association and vice president of Columbus, Ga.-based United Monitoring Services,  said that AT&T is going to have to make a "substantial investment" to be successful in the industry.

"When they invest in marketing and advertising, I think it will increase the consumers’ awareness and the credibility of our industry," Glore said. "And then more people are going to want systems and want to buy and I think that will  benefit the small dealers, even the ones that don’t have big advertising budgets."  

Though the entrance of AT&T and others into the market should spur dealers to advance the technology solutions they provide, Glore believes that there will always be those customers that are just going to want the basic security package and some companies may continue to be successful with that.

McVeigh believes that the entry of companies like AT&T will also spur innovation among the equipment manufacturers, which could also bode well for dealers.

"These companies that are coming in with these massive advertising budgets are very attractive to the vendors, so the panel manufacturers are going to be wooing these companies and it’s almost like NASA coming in and saying 'we need something specialized.' These companies are going to develop an even more specialized product for our industry and we’re going to benefit," McVeigh explained. "The smaller dealers are going to benefit because they are going to get that offering to us as well, so we’re going to see a lot more new technologies coming out because of these big dollars coming into the industry. It’s going to create for us, a trickle-down effect that we’re going to see all of these neat, new products. It’s very exciting what’s on the horizon."

While he feels this could come to fruition, Callahan feels that these technology vendors will still take a "wait-and-see" attitude.

"I think if there is a success level that could very well play out," he said. "I don’t think the manufacturers are going to jump through hoops initially until they see what kind of scale is being obtained."

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