Industry Consolidation is on the Horizon

When comparing the video surveillance landscape to other technology markets, it becomes clear: Change is inevitable


As an outsider to the video surveillance industry, one gets struck by its fragmentation. At ISC West 2013, there were more than 1,000 different booths where companies exhibited some type of video surveillance product. The top 10 surveillance vendors in the United States only control about 40 percent of the market, with the leader currently holding an 8 percent market share.

When comparing this situation to other product-oriented industries, it is clear that the current situation is something of an exception. It begs the question: Will there be fewer or more camera exhibitors at ISC West in 2016? Building on relevant theory and evidence from other industries, this industry is likely to become more consolidated in the coming years.

 

The Rule of Three: From Soft Drinks to CCTV

Back in the 1970s, consultants at the Boston Consulting Group (BCG) drew on economic theories to develop “the rule of three” — a statement which posits that in any industry, there will only be three profitable actors, while the rest will either struggle and gradually exit the market or become niche players with very small market share.

The underlying rationale is largely related to economies of scale — i.e. the fact that larger firms can reap cost benefits from larger volumes. This holds true not only for manufacturing, but also distribution, purchasing, logistics, R&D and branding.

The soft drink industry provides a perfect illustration of this pattern, as it is dominated by three large players, Coca Cola, Pepsi Co., and Schweppes. Those three companies are able to put up the money required for advertising, while at the same time, they are able to squeeze suppliers and maintain a strong bargaining position with stores selling their products. They also have the clout to purchase the smaller competitors’ brands.

But can we really use economics from the 1970s and compare soft drinks to technology-intensive products like security cameras? While there is some truth to the argument related to economies of scale, it obviously does not paint the full picture. A distinguishing feature of video surveillance is that the industry is undergoing rapid technological change, which is perhaps the main reason why it remains so fragmented today — and at the same time the main reason why it is likely to consolidate in the coming years.

 

The Technology Shift: Analog to IP

The ongoing change from analog to IP-based surveillance systems can be regarded as a technological discontinuity. Industries normally go through a period of turbulence when the established technology changes. At the initial advent of a new technology, very little happens — a couple of firms make improvements that the old technology could not deliver and begin selling into some fringe market segments who appreciate the new performance attributes.

As the new technology becomes more competitive, it-s market grows. This in turn sparks a wave of entry into the industry. At this point in the technology cycle, firms which dominated the old technology coexist with all the entrants who have been attracted to the “gold rush” promising great fortunes for everyone. But like the Klondike gold rush of the late 1800s, as more join the search for gold, the less there is to go around.

This pattern can be recognized in several historical examples of industries undergoing technological change. By the late 1960s, mechanical calculators were increasingly displaced by electronic ones. In the United States, only 11 firms entered this industry between 1962 and 1970, with 10 surviving. As prices declined and the technology was further improved, entry increased and 21 firms joined the industry in 1970-1972.

The smartphone industry took the same journey, starting with IBM’s Simon in the early 90s, followed by a few innovative competitors including Palm, Nokia and RIM’s BlackBerry, to the game-changing iPhone that hit the market in 2007. Today, we are back to three main platform competitors: Apple, Android and RIM (with Microsoft launching new products in hopes to overtake RIM’s 5 percent share).

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