Security industry to undergo major structural changes

Big security companies 'wait and see' strategy allowing others to drive innovation, steal market share


The message from the market seems clear; major conglomerates in the security business have given up on their long standing strategy of growth through acquisition. None of them excluding Tyco, have made a significant acquisition since 2010. In the five years prior to that, they were all active in acquiring businesses both large and small; increasing their geographic scope and updating their technology.

Instead, the market now faces what Martin Gren from Axis Communications calls "consolidation by starvation."

"There are now more than 500 manufacturers of IP cameras and this high amount is not sustainable," he said. "The bulk of smaller players will be forced to exit the IP camera industry as they will not be able to afford the necessary R&D costs. The top players who can effectively execute their strategy and invest in R&D will prosper. Some, but not all, will acquire the relevant technology."

Axis fully expects that in 10 years time, the top 10 companies in the world will own about 90 percent of the total video surveillance market.

As the major conglomerates have turned off the acquisition tap, the flow of innovative products has declined and with it market share has been lost. So why adopt this strategy? There are several possible answers:

  • They don’t think it’s the right time to buy as exit values will fall. Trading conditions in the last three years have been difficult and margins have tightened. Larger companies may well have decided to lie low for this reason. But many medium and small specialist companies have grown rapidly and demand in some sectors and countries has been in double figures.
  • Difficulty in raising the cash. The conglomerates are cash rich and also have access to plentiful supplies of low interest finance, so this can’t be the reason.
  • Better opportunities to invest in other areas of their business. This is a strong possibility for Honeywell, Schneider Electric (Pelco), Siemens, UTC, Panasonic, Samsung, etc. Some are strong in energy conservation, smart grid and aerospace, where they have made significant investments.

The majors have been more successful in the system and integration business where size and scale is a basic requirement and they feel more comfortable.

We agree with venture capitalist Paul Graham in his statement: "It turns out that the rule 'large and disciplined organizations win' should be appended by 'at games that change slowly.'"

We have for some time argued the case that a new model for the products business will kick in and that seems to be happening. The security industry, whilst not the fastest mover, is undergoing some significant shifts in technology.

There are four main reasons why we expect the "new economy" to change the
structure of the physical security industry:

  1. The pace of innovation is speeding up, not slowing down. Edge-based storage and advances in analytics are creating more and more applications for IP video.
  2. Open standards are starting to take a hold and eventually best of a breed will be de rigueur. This will open up competition even further and will reduce the barrier to smaller companies.
  3. This increase in competition will then kill off weaker companies and consolidation will come about through open market forces.
  4. The strong brand and channel infrastructure of the conglomerates, which gave reach and efficiencies in marketing across the globe, can now be achieved by small companies through the Internet at a lower cost.

The fact that products become more important in the "new economy" is not a reason to totally write off conglomerates that have interests in security. However it will require them to improve their products' performance and, in the short term, they are more likely to achieve this through acquiring the relatively newer successful companies out there.

For more information on the security market including market sizing, structure, technology and investment visit our report page at http://www.memoori.com/portfolio/the-physical-security-business-in-2012/