Cable firms, telcos making their presence felt in the alarm industry

There has been a bevy of new entrants to the home alarm and automation market over the past several years including AT&T, Comcast and Cox Communications just to name a few. News of these big telecommunications and cable firms coming into the space have been met with relative shrugs by many traditional alarm companies and some believe that their entry will mark a windfall for the industry as a whole by increasing awareness among consumers through their advertising spend. Many people who have been around the industry long enough also remember the failed incursion by some of these same companies following deregulation of electric utilities and telcos in the 90s. However, there are increasing signs that these new players are beginning to carve out a large enough share of the market that it may be impacting the bottom line for the rest of the industry.

Shares of ADT plunged last month after the company’s first quarter profits for 2014 failed to meet analysts’ expectations. The company blamed its lackluster performance on the fact that they added fewer customers to their roles than expected. ADT also reported a year-over-year increase in its customer attrition rate, which Naren Gursahaney, the company’s president and CEO, said was due primarily to relocation disconnects brought about by the continued recovery in the housing market and not competition. However, Gursahaney told investors on a conference call last month that the evolution of home automation has brought about increased competition in the market. “More competitors across the spectrum have entered the market over the past few years to pursue this growing opportunity,” he said.

As a result, Gursahaney said that increased advertising by these new market entrants to build brand awareness has put pressure on ADT’s lead generation activity and they’ve had to increase their advertising levels as a result to “maintain an appropriate share of voice” in the industry. “While I say we expected a ramp up, we didn’t expect a ramp up to that magnitude,” he said.

The impact that these companies are having on the market was a hot topic at last week’s Barnes Buchanan Conference in Palm Beach, Fla.

In his annual industry and market overview, Michael Barnes, founder of advisory and consulting firm Barnes Associates, which helps alarm companies navigate the complexities of mergers and acquisitions, said that unlike the last time that telecom and utilities tried get into the alarm business, some of the dynamics of the industry have changed this time around, chief among them being technology. No longer are people satisfied with a burglar and fire alarm system for which they pay a monthly monitoring fee for.  Consumers are now demanding interactive services that deliver more value and enable them to be in touch with what’s happening within their homes at all times. “It was simple when it was all about intrusion and fire,” Barnes told attendees.

Barnes said the telecom and cable companies also see the opportunity to increase the market penetration of residential security systems, which remains at around 20 percent. “That’s why they’re here,” he added.

While ADT is the recognized leader in home security when it comes to market share, the sheer size of these recent market entrants makes the company seem small by comparison. For example, while AT&T and Verizon saw more than $120 billion in revenue in 2013, ADT had just $3 billion. And while AT&T, Comcast and Verizon all had advertising budgets north of $1 billion last year, ADT’s marketing budget topped $170 million.

Jim Callahan, CEO of Atlanta-based Ackerman Security Systems, said he’s seen the strong advertising push that companies like AT&T and Comcast have made, but he believes it’s a situation where the rising tide raises all ships. In addition, Callahan said he’ seen no anecdotal evidence where these companies have been successful in the industry to date and that they’re not losing accounts because of their presence. “We’re paying attention, but they’re not hurting us yet,” he said in a presentation at the conference.  

Although these companies have the resources necessary to make a strong push in the industry, Barnes said their size doesn’t necessarily give them an advantage over more traditional alarm companies and that they, in fact, face the same challenges that other companies do in the market such as attrition, subscriber acquisition costs (SAC) and equal access to technology. “I don’t see any fundamental competitive advantage in terms of their operating costs,” he said.

This is the same reason that smaller companies have been able to remain very profitable and compete with larger alarm companies for years. “At the end of the day, the idea that there is some massive advantage in economies of scale isn’t true,” Barnes said. “This is still a block-by-block fight for market share.”

Barnes said there are also still some factors that could cause cable and telecom companies to lose interest in the security industry as they previously did. For example, many consumers and small business owners remain skeptical about the ability of cable and phone companies to provide a service as critical as security. Most of these companies also believe that their large customer bases will translate into an advantage when it comes to subscriber acquisition costs and that their ability to bundle services will work to their advantage. If these don’t come to fruition and security doesn’t have a payoff as soon as shareholders would like, then they could flame out of the business again.

On the other hand, Barnes said there is the potential for a game changer to occur that would lead these new players to be in the business for the long haul. Among these game changing events could be that consumers begin to embrace these companies as security and automation providers and that by bundling security and automation services they find that attrition rates for their core product declines. This would enable them to drastically cut prices and induce a price war in the market. Other industry changing events could also be the introduction of a proprietary product that catches the eye of consumers or if one of these companies decides to buy a company on the magnitude of an ADT.

Time will tell as to what the exact impact of these new entrants will be, but one thing is certain, alarm companies cannot ignore their presence any longer. “I think they’re going to be a serious competitor in the market,” said Barnes. 

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