Industry Consolidation is on the Horizon

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

With IP video now firmly established, the video surveillance industry has reached a similar phase as in the above examples. CCTV and IP video coexist at present, while the high growth of IP video over the last years has attracted a lot of new entrants. This is confirmed by the fact that the top 10 players controlled 50 percent of the video surveillance market four years ago, while this figure has today declined to about 40 percent.


Factors Leading to Consolidation

Why then would the industry start to consolidate at this point? Here are several factors that might contribute to less fragmentation in the coming years:

1. Established firms exit the market: By the early 1970s, most manufacturers of mechanical calculators left the market as the industry was increasingly dominated by entrant firms such as Sharp and Casio. Not only had the competencies of these firms been rendered obsolete — as they knew precise mechanics and not electronics — their vertically integrated business models became inapplicable with the shift to electronic calculators. These firms manufactured their own components and maintained a vast service network, factors which together contributed to high barriers to entering the industry. As calculators became electronics-based and more capable, they were also increasingly sold via other channels and to different groups of end-users, putting incumbents in an awkward position.

While analog incumbents in the CCTV industry have so far been better off than these calculator companies, it is still clear that the shift to IP has upset and altered established practices in the industry. The required technological competencies have arguably also changed, as IT skills are becoming increasingly important. It remains to be seen whether analog incumbents will be able to stay competitive, but it would be surprising if all of them are still left in the same shape four years from now.

2. Competition forces entrants to leave the market: Accounts of technological change usually paint a picture of conservative incumbents being displaced by innovative entrants. Such descriptions are largely incomplete and they rarely attend to the fact that entrant firms are often also wiped out of the market.

A lot of firms entered the electronic calculator industry in 1970-72, trying to grab a share of this rapidly growing market. Soon after, however, most left the industry as they struggled to deal with increasing competition. Going back to the Klondike analogy, the promise of gold creates a swarming pattern around the new technology, but as so many search for the same gold, few get rich since the industry becomes highly competitive.

A growing market is by no means a guarantee of growing profits. When looking at the hundreds of companies now offering IP-based cameras today, one must ask whether they all are able to compete in the long term. Some of them are arguably too vertically integrated, others will have inferior products with no ability to differentiate, and others lack sufficient technological competencies. It remains to be seen which ones possess both technological skills and the right business model — those will be the survivors.

3. Economies of scale increase in importance: Increased competition is far from the only factor driving the industry towards consolidation. Going back to “the rule of three” and the arguments related to economies of scale, these seem largely applicable in the video surveillance industry.

A larger player can obtain lower costs throughout its entire value chain, thereby having the luxury of either making a larger profit or lowering prices to levels where smaller firms take losses. In terms of brand recognition and market coverage, the odds also favor the larger players. Furthermore, a large company can invest more money in R&D than smaller actors — in some cases, they can even reinvest significantly more money than the small company makes in revenue per year.

However, having more engineers does not always mean a company will win – the fact that Nokia had 30,000 engineers did not prevent them from collapsing in the shift to smartphones.