DirecTV's recent acquisition of LifeShield could be a forerunner to more partnerships and M&A activity in the home security industry.
Photo credit: (Photo courtesy Wikimedia Commons/Dwight Burdette)
Earlier this week, satellite television firm DirecTV entered the residential security market with its acquisition of LifeShield Home Security. Based in Langhorne, Pa., LifeShield provides wireless home security solutions and monitoring services to more than 20,000 customers in every major metropolitan market across the U.S. Financial terms of the acquisition have not been disclosed.
According to Brad Bentley, senior vice president of revenue strategy and planning for DirecTV, the home security market was attractive to the company for several reasons.
“From a home security perspective, it’s a high margin, low-churn and a really low-penetrated business,” Bentley said. “We also looked at it as a natural extension of the DirecTV product offering. We do have a national footprint of technicians, consultants, as well as dealers, so we’re in homes everyday and looking to provide additional value. That, coupled with our expertise in delivering an exceptional video experience, we felt we had an opportunity to bring home security in that product offering.”
Although the company looked at a couple of different options, Bentley said LifeShield seemed to be a “perfect fit,” as they offer a completely digital, wireless and easy to install solution. Bentley said DirecTV’s plans for LifeShield moving forward are two-fold.
“We plan to retain the brand LifeShield, that they continue to sell do-it-yourself home security products, which is at the core of who and what they are today, and by extension we would create a DirecTV affiliated brand that we would offer to our 20 million subscribers as part of an upgrade opportunity, as well as to the three-and-a-half to four million new customers we bring on each year,” he explained.
In addition, Bentley said that LifeShield’s management team, including its founder and CEO, will be retained by the company.
“We believe we have an edge from a home security standpoint because we have a premium brand. We have a tremendous sales and marketing engine and that, coupled with our leadership in technology and innovation, we think we can create a truly differentiated experience,” Bentley said.
Marshall Marinace, president of Yorktown, N.Y.-based Marshall Alarm Systems and the incoming president-elect of the Electronic Security Association, believes it remains to be seen exactly how much success DirecTV and other recent market entrants will enjoy as many of them are still feeling their way around the industry.
“Many times, and we’ve seen this with other cable companies or similar providers of bundled services, is that they come out early, make this splash and see how much it holds weight,” Marinace says. “And as we’ve seen with some other similar situations, they don’t even have a product that they will be marketing yet. They’re just trying to get the programs up and running and get familiar with the consumers and so forth.”
Jeff Kessler, security industry analyst and managing director of Imperial Capital, LLC, said that a big differentiator between the entry of DirecTV to the market and that of cable or telecommunications providers is that they obviously recognize the need to have an established service component if they want to be successful.
“The acquisition was, in some ways, a very carefully thought out transaction in that DirecTV made the clear choice not to just jump into the market with discounted pricing on both installation and monthly services,” Kessler said. “They very well may use LifeShield to promote discounted services and equipment, but what is most notable is that instead of deciding to do this on their own, they bought a company with an existing base of highly regarded service and expertise in the five CMS (Criticom Monitoring Services, a division of Protection 1) monitoring stations that LifeShield uses. Whether or not DirecTV/LifeShield will continue to use CMS we’ll have to see, but it is a clear signal that DirecTV realizes the one, huge disadvantage that the telcos and the cable TV companies have in trying to come into this business, which is a lack of customer or potential customer or subscriber trust in their service offering.”
Bentley said there is “no intent at this point” to change the monitoring agreements that LifeShield has with Protection 1.
Marinace agreed that acquiring an established security company will give DirecTV an advantage over their competitors, many of whom have tried to start from scratch. “Certainly, it will help them hit the ground and start running,” he says.
According to Kessler, history has proven that price cuts and marketing blitzes alone will not pry customers away from established alarm companies.
“We see this over and over again in polls that price by itself will only drive a small portion of customers from the security industry over to the cable and telco guys,” he said. “Clearly, a service component, a trust in having someone being able to verify and get police to your door within seven or eight minutes, or having someone with a medical certification in the monitoring station stay with you for 35 minutes until responders can arrive is a big reason why we believe it will take several years of very hard marketing and perception changing or branding, if you will, to get away from the notion that if a telco or cable operator is running a company that you’re going to get the same, ‘we’ll be here sometime between the hours of eight and five’ service.”
Another challenge that Marinace feels that many of these new players have not given a lot of thought to are the licensing requirements that home security systems installers have to meet, which vary depending on the state.
"Many states require licensing. There is not a national license as of yet, so it requires those subcontractors under the corporate name to be licensed with background checks, education requirements and proof of employment or how many years they’ve been in business," explained Marinace.
Kessler believes that the acquisition could also be a precursor to more partnerships and/or M&A (mergers and acquisitions) activity in the industry.
“DirecTV has short-circuited this by instead of going into the business own their own like Comcast and Rogers and everyone except AT&T, who is building their own monitoring stations, we believe that this is a sign or a shot across the bow that there will be more partnerships and potential M&A as more cable and telco companies realize that they need this service component and the trust of life safety services being done by a professional monitoring group of longstanding in order to take the type of market share that they want,” Kessler explained. “The long and short of this is that we do believe that people are going to look at this and say, ’this is a much more intelligent way for the cable and telco guys to come into the business,’ rather than just provide service through generic customer service centers that don’t have the long-term training in life safety, fire or health services that the security monitoring firms do. We really do have some suspicions over how well a carrier will be in keeping customers if they do not upgrade their service capability from what has been perceived. And who can help you do that? Well, a security company can.”
Kessler said that companies continue to gravitate toward the home security market because it is an important component in being able to offer a “full-blown” home services package.
“Security is an important and natural addition to a cable company’s triple play and they’ve tried this before,” he said. “Ten years ago, when we didn’t have the advantage of having a software platform like Alarm.com or iControl making the incremental costs very small for you, they tried to buy all of these security companies and they ran into all these problems with regards to accounting because all of these acquisitions were dilutive, the cultures were incredibility differently, and most important of all, trying to operate the monitoring side of this business is incredibly hard. It was just too much for the cable companies to deal with so they just got out of the business.”
Whereas bigger dealers have the resources to fight back against this continued incursion from companies outside the traditional security space, Kessler believes that it will be the smaller firms that stand the chance to be hurt the most by new market entrants. “I think where the real risk in the security industry is involved is in many of the smaller companies who don’t have the financial wherewithal and the capital capacity to invest in some of these software platforms,” he said.
While the market penetration for home security systems has been stuck around 20 percent for some time, many analysts feel that number will increase steadily in the coming years as security systems move away from what has traditionally been viewed as a negative cost with the evolution in home service capabilities.
“The reason why we think the penetration is going to improve dramatically now is the value proposition has improved dramatically with these new software platforms,” Kessler said. “You can now control your system remotely, you can contact and deal with the monitoring station or the police remotely, you can see and you can hear what is going on in your premises, and you can monitor people in the house for health reasons. On top of that you can add a whole bunch of home services if you want –ranging from thermostats to lighting and automation of the home. In fact, you can basically order pizza off of the same PDA in your home control platform.”
Despite their national footprints and large marketing budgets, Marinace remains skeptical of these new market entrants' ability to deliver the quality of service that consumers are accustomed to when it comes to security.
“We’ve seen these large players come into the industry before,” says Marinace. “I’ve been in the business almost 40 years and over the years, predominantly what has happened is that they’ve come into the industry with a big bang, they’re around a few years and they see that it might not be for them and they fail. There is high-mortality rate for them.”