Special Report: Industry Consolidation

July 14, 2015
In the security industry, it seems like there’s always a bigger fish. Get a handle on the impact of M&A activity in this exclusive roundtable.

While consolidation has been seen as inevitable within the industry for some time, there had not been any M&A deals of great magnitude until last year. In fact, in late 2013, IHS Research released a report that said the security industry would be marked by increased competition rather than consolidation in the near future.

That notion was turned upside down last August, however, when Canon — a relatively obscure player in video surveillance until that point — surprised many by acquiring video management software powerhouse Milestone Systems. Canon would shock the industry again in 2015, when it announced plans to acquire Axis Communications for just less than $3 billion.

Other notable acquisitions since the beginning of 2014 include: Vicon’s purchase of IQinVision; Vanderbilt’s acquisition of Siemens’ Security Products Business; and Anixter’s purchase of Tri-Ed. In just the last few months, Eagle Eye Networks founder Dean Drako acquired Brivo; and Apollo — a global private equity firm — acquired both Protection 1 and ASG Security and merged them

In the wake of this increased activity, SD&I and SecurityInfoWatch.com brought together a panel of vendors, integrators and industry analysts in this exclusive roundtable to discuss the positive and negative effects of security industry mergers and acquisitions.

Meet the Panel

  • Dr. Bob Banerjee is Senior Director of Training and Development for NICE Systems' Security Division. To request more info about NICE, visit www.securityinfowatch.com/10214502.
  • Ray Bernard, PSP, CHS-III, is the principal consultant for Ray Bernard Consulting Services (RBCS), a firm that provides security consulting services for public and private facilities. For more information, go to www.go-rbcs.com or call 949-831-6788.
  • Bill Bozeman, CPP, is President & CEO of PSA Security Network. To request more info about PSA, visit www.securityinfowatch.com/10214742.
  • Paul Bremner is a senior analyst in the industrial & medical technology group at IHS Research.
  • Jon Cropley is a principal analyst for IHS Research in its video surveillance and security services group.
  • Frank De Fina is senior director of strategic sales for Hikvision USA Inc. To request more info about Hikvision, visit www.securityinfowatch.com/10215768.
  • Blake Kozak is a principal analyst with the Security and Building Technologies group of IHS Research. 
  • John E. Mack III is Executive Vice President, Co-Head of Investment Banking and Head of Mergers & Acquisitions at Imperial Capital. 
  • Skip Sampson, CPP, is Vice President of Security-Net’s Board of Directors and President of KST Security, Indianapolis, Ind. To request more info about Security-Net, visit www.securityinfowatch.com/10601499.

Do you see vendor consolidation as a positive or negative for our industry, and what is the specific effect on the dealer/integrator channel?

Bozeman: Of all the challenges security integrators and vendors face, industry consolidation is at the top of the list. No need pointing out specific cases as anyone who is our business has experienced the ramifications of consolidation, some good , some not so good. I have personally experienced both.

Bremner: It’s unclear yet whether vendor consolidation is a positive or a negative for the industry. On the one hand, it could be a positive sign for the industry as it signals that the industry is maturing; however, this could also be a negative as mature markets tend to have fewer disruptive innovations as customer needs and desires are more firmly fixed. This shifts the focus of the integrators, as price, brand or channel strategy supplants product innovation as a key value driver.

Sampson: I see it as a positive. The security industry has way too many manufacturers and resellers within the video and access control marketplace. Some companies manufacture products and some resell it as an OEM and it can be too much. When I attend ASIS and ISC West, I see rows and rows of cameras, but most of these products don’t really do anything differently from each other and having too many companies in the market can complicate the buying process for an integrator.

De Fina: In the best-case scenario, the SIs can solve an end user’s problem by utilizing components that have been technically and operationally integrated, and there is high probability that the system will function well. On the negative side, an individual component of the “total solution” may not necessarily be the best option for a customer. It is reminiscent of the days when pro audio components were assembled using best-in-class speakers and amps that provided the overall optimum solution.

What are some of the factors driving industry consolidation among technology manufacturers, as well as systems integrators?

Bernard: There are many drivers for manufacturer consolidation. I see the technology drivers as game-changers for the security industry, as has already occurred in other industries, such as automotive. Information technology trends are the primary enabler for the accelerating rate of physical security technology advancement, as well as for the advancement of technologies in other industries. Widely pervasive IT megatrends such as digitization, miniaturization and virtualization — combined with rapidly expanding capabilities in computing power and networking — are driving increased incorporation of information technology into products across all industries. This pervasive utilization of computing has made algorithms the single most powerful instrument of change in today’s world.

Bremner: From the viewpoint of a systems integrator, technological innovation appears to have slowed down in the security equipment markets. Another factor related to this is that customer needs and desires are not evolving rapidly. The security industry’s needs and desires to guard against risk and protect assets are not evolving rapidly in the physical security space — the risks they are facing and the assets they protect are relatively stable. What has been evolving is the method of achieving this aim, which in the past has been in the form of technological innovation. This has allowed integrators to offer an enticing value proposition for customer by offering new, “best-of-breed” technology. As this competitive advantage lessens, integrators turn to different strategies such as reducing prices, building a strong brand or reputation, and building a channel strategy, such as focusing on certain vertical markets or geographic regions. Often, this leads to consolidation as smaller integrators are bought by larger ones who are looking to improve their geographic or vertical market coverage.

Mack: The key factor is larger acquirers who are now selling full, integrated product solutions. The key driver for consolidation among integrators is the ability for larger integrators to handle more sophisticated technology and to handle larger jobs across bigger geographies.

Bozeman: Available cheap funding, strong financial incentives on the buy and sell side and a fragmented industry that has growth potential all lead to an ideal market for consolidation.

Sampson: On the manufacturing side, consolidation is driven by an attempt to get some economies of scale or to fill in holes in a product line that they might not have without having to go the R&D route. For some manufacturers in our industry it is very important to have a complete offering of products that integrate together, such has as cameras and access control systems, so they will look to complete their portfolio with that fully integrated offering. On the integrator side, a lot of the consolidation is due to customer demand. It is important to have the resources to handle a regional or national account. Still, for some integrators, the drive for consolidation is fueled by a desire to build a business and then exit the market.

How will vendor consolidation change the landscape of the security industry in the next 5-10 years; and did the recent Canon acquisitions change or influence your opinion?

Cropley: The supply base for video surveillance equipment remains highly fragmented. In 2014, the top 15 vendors accounted for just 52 percent of revenues. A large number of small vendors accounted for the rest. Only one vendor had a market share greater than 7 percent. Most people agree that there are too many vendors out there. Greater consolidation is coming, it is just a question of when. The recent Canon acquisitions could speed up the pace of this consolidation as vendors rush into acquisitions for fear of missing out on deals to their rivals.

Mack: We will see the entry and expansion of more larger and technologically sophisticated players. Canon is a perfect demonstration of this trend as is the Panasonic acquisition of Video Insight. Canon is No. 3 on the top 10 issuers of new patents in the U.S. for 2014. Many other names on this top ten list are expanding their presence in the security industry including; Samsung (No. 2), Sony (No. 4), LG (No. 9) and Panasonic (No. 10).

Banerjee: I expect some very carefully planned consolidations will to lead to a few giants that will not only dominate the security and safety industry, but will lift us into a new space. In that environment, the value proposition of those same products and solutions will express direct and quantifiable effects on operations. They will be visible to the C-suite, who would like to perceive their security departments as a contributing asset, not just a cost of doing business.

Bernard: Manufacturer consolidation has a great potential for revolutionizing security technology capabilities almost beyond imagination. Canon is a leading innovator in high definition video technology. Canon’s acquisition of Axis, for example, could leap-frog security’s adoption of advanced video technology — and more importantly, do it at a much higher level of reliability and performance than it typical for security technology innovations.

De Fina: Some of the recent major acquisitions portend major change. We always hear that “things never change,” but you have to imagine that these acquisitions had a strategic component that aimed at domination of a particular niche. We’ve also seen some recent acquisitions that did not turn out as intended.

How does consolidation affect a dealer/integrator’s ability to offer solutions to its customers?

Banerjee: It will make some integrations easier and more reliable since it they will be done in-house. It is a reasonable assumption that the consolidated business units’ R&D teams will begin to work seamlessly; although, in reality, this can take some time following a merger.

Bremner: On the positive side, it will streamline internal purchasing processes as integrators move to using fewer vendors, thus saving themselves and their customers’ time and money. Integrators will be able to benefit from consolidated price reductions, enjoying volume discounts from vendors, and it also helps them build stronger working relationships with those vendors. Finally, it allows integrators to become intimately familiar with the vendor’s technology, which should improve installation and service. On the negative side, vendor consolidation may make the integrator’s job easier overall, thus inviting competition from companies who have historically not deployed security equipment.

Bozeman: In the case of the acquired integrator, they will have more financial stability, a broader geographical footprint and additional technical and project management resources. An opposite argument can be made by the stand-alone independent that he/she is just that, a local business where the owner and not a frequently transferred manager runs the show with the passion that only an owner possesses. Red tape is eliminated and the owner can spend time on the customer vs. reporting financial metrics on a daily basis. A case can be made for either — many end-users prefer the personal touch of a local company while other want the security blanket of a regional or national.

Sampson: I don’t believe it changes it in any way — at least not in the foreseeable future. There are tons of manufacturers out there on the video side, so the consolidation has not had a meaningful impact yet. As an integrator, we still present the best solution to the customer. Eventually, consolidation could simplify things because we would have fewer manufacturers to keep up with.

How can security dealers/integrators leverage vendor consolidation to their advantage?

Bozeman: Integrators need to leave themselves options. It may sound nice to give all your business to one vendor; however, this has proven to be a very risky plan. Some of the world’s largest, most powerful companies got into the security business boasting they would take over and then pulled out, leaving many integrators holding their breath. Integrators need to have a backup plan with multiple vendors available in both video and access control. A big company is just as likely to sell their security division as a small vendor is to sell the entire company. In the security business, there is no security so smart integrators spread the risk potential by deploying multiple vendors.

Banerjee: Most likely, they will feel more confident when approaching more complex projects, although it will still be a common need to integrate with other vendors’ systems. For example, in order to leverage legacy technology — existing cameras, access control systems, or a mass notification system — systems will need to be integrated.

De Fina: First, they should be careful not to jeopardize their business by limiting their options. Second, they should choose a brand with a broad scope of products and one that is sufficiently capitalized to be able to survive the next five years of consolidation. Third, they should look for reliability, interoperability and value, which will continue to be significant differentiators to winning major projects.

Mack: The need to work with less product companies in a typical job will make it easier for training, inventory, management support and a number of other related functions.

We’re obviously seeing a lot of consolidation around video surveillance currently, but do you think this will extend to other segments of the market?

Kozak: The access control industry will likely see additional M&A activity in the short term as suppliers look to fill gaps in their portfolio and reach new markets. The key question is how suppliers will look to support their channel partners and solve problems for customers. Having an integrated portfolio will be increasingly important. Although M&A activity may increase to expand product lines and customer bases (e.g. 3xLOGIC acquiring infinias or Avigilon acquiring RedCloud), IHS also expects companies to acquire along a more linear path, e.g. HID and IdenTrust with the expectation to specialize in converged systems and identity management.

Bernard: In the coming decade, pervasive computing will continue to blur the distinctions between various technology segments. Users would benefit by a shift from product-based segmentation to segmentation that is aligned with end-user needs and security operations capabilities. For example, intelligent video technology already performs intrusion detection and access control functions. Hopefully some of the industry consolidation will focus on end-user vertical markets, which will simplify technology acquisition and deployment for many customers.

Bozeman: Video lends itself to consolidation more that access control or other supporting peripherals. We have five key enterprise access control players dominating the U.S. and a handful of secondary players. Video, on the other hand, seems to have thousands of camera manufacturers with more coming out of the woodwork every day.

De Fina: Most definitely. The security market is growing quickly but it cannot sustain hundreds of manufacturers. This is the driver behind consolidation. Customers should always ask themselves: “Will this company still be in business in fiveyears?”

Sampson: There will always be consolidation, but that also does not mean that new manufacturers won’t enter the marketplace as well, such as from Europe, Australia or Israel. We see this happening on both the access control and video side of the market.

Are you seeing or do you expect to see increased consolidation activity among integrators?

Bremner: The integration market is very highly fragmented. In 2014, the top 15 integrators accounted for just 20.4 percent of revenues. The remainder went to the innumerable smaller integrators and installers that characterize this market. Only one vendor had a market share greater than 4 percent. While there will continue to be consolidation in the form of mergers and acquisitions in the integration market, I do not believe we will see this increase to a point where the structure of the market fundamentally changes.

Sampson: There will always be a place for local alarm companies in every community, but for integrators that are doing high-level integrated security systems like Security-Net partners, there will be continued consolidation. Consolidation will continue to happen because integrators need economies of scale to handle business on a national basis and access to the best technicians and training programs.

De Fina: Yes. Many of the regional integrators have spent years establishing themselves in a market. Their success is always about the customer and the trust level with the people they do business with. It takes years to grow that trust. A big, national, SI might have trouble capturing market share in a given region due to established integrators operating locally. Sometimes the best move is to acquire the established integrator.

How does distributor consolidation impact dealer/integrators and the industry as a whole?

Bozeman: It was not long ago that we had hundreds of security distributors, with several independent distributors in every town of any size. Now, we have a handful of distributors owned by giant public companies and private equity groups. Independent security distributors are as rare as snail darters. Distributors now serve up a wide host of services that the traditional smaller independent distributors did not have the resources to offer, consequently, they are gone for the most part.

Banerjee: I suspect that their increased buying power will give them better margins at the expense of the vendors. I also expect that regional and national system integrators will benefit from improved consistency of availability and support across the territory, which should translate into improved customer satisfaction.

Sampson: It really doesn’t have an impact as distributor consolidation has been minimal. When many distributors buy another business, they then let that business stand on its own. In the case of Anixter’s acquisition of Tri-Ed, for example, they maintained the Tri-Ed brand and business.

Bremner: Distributor consolidation could potentially act as a trigger for the integration industry to begin consolidating more rapidly. As the distribution market consolidates, smaller installers and integrators will be less able to benefit from the price reductions from volume discounts that these larger distributors could bring to the market. However, larger integrators would be able to benefit from these price reductions, providing them a competitive advantage, which they could wield by purchasing those smaller competitors, thus sparking more widespread consolidation of the integration market.

De Fina: The trend here is to find the “Distributor Niche.” There are successful distributors with multiple storefronts who do excellent business and serve the customers exceptionally well. That will continue to the benefit of the industry. Simultaneously, the “Value Added” distributor can perform many services for an SI, which essentially means providing sub-assembled components shipped directly to a project site.

What do you expect might be some of the unintended consequences of the consolidation among both vendors and systems integrators?

De Fina: Any consolidation places great pressure on processes. In the short term, the quality of service from a given distributor or vendor may go down until the internal issues of the consolidating companies are resolved.

Bozeman: When the consolidation dust settles, we will see less video vendors, similar to what we have in access control. I also see pricing stabilizing, bottoming out and eventually actually rising a bit on the video side. We will also see some larger vendors competing with the integrators in certain verticals and partnering with them in other verticals. This is already happening and I expect more in the future.

Mack: An end-user’s hands-on customer service experience with small to medium size integrators will likely be lost. In the product companies, the ability to truly customize solutions is likely constrained.

Sampson: Sometimes when a business becomes larger and more layered, the processes then become more complicated. Bigger is not always better for employees or customers, and large amounts of growth through acquisition does not always have a positive impact. Companies risk losing the DNA that made them successful in the first place and it can become a challenge to maintain that after an acquisition.

Banerjee: Some agnostic-oriented vendors use openness and independence as core differentiators. They depend heavily on a carefully developed ecosystem that they do not compete with. It may prove challenging for them to convince the market that these core qualities remain post-consolidation. This might cause their ecosystem to shrink as a counter-force to the possibility that the combined solutions will actually expand the ecosystem.

Paul Rothman is Editor in Chief of Security Dealer & Integrator (SD&I) magazine (www.secdealer.com). Joel Griffin is Editor of SecurityInfoWatch.com. 

About the Author

Paul Rothman | Editor-in-Chief/Security Business

Paul Rothman is Editor-in-Chief of Security Business magazine. Email him your comments and questions at [email protected]. Access the current issue, full archives and apply for a free subscription at www.securitybusinessmag.com. 

About the Author

Joel Griffin | Editor-in-Chief, SecurityInfoWatch.com

Joel Griffin is the Editor-in-Chief of SecurityInfoWatch.com, a business-to-business news website published by Endeavor Business Media that covers all aspects of the physical security industry. Joel has covered the security industry since May 2008 when he first joined the site as assistant editor. Prior to SecurityInfoWatch, Joel worked as a staff reporter for two years at the Newton Citizen, a daily newspaper located in the suburban Atlanta city of Covington, Ga.