Back in 1995, Jeff Bezos launched an online bookstore and called it Amazon...years later, bookstores gradually began to disappear. As Amazon expanded its offerings to include just about anything, brick-and-mortar stores in established malls across the country started disappearing. Amazon acquired Whole Foods in 2017, and already two major grocery retailers (Tops Markets and Southeastern Grocers) have filed for bankruptcy.
In 2018, Amazon set its sights on the home security market by acquiring brands Blink and Ring, and announced a home security offering with monthly monitoring as low as $10. Will this mean the stalwarts of residential security have the potential to go the way of Borders Bookstores, Sears and Winn-Dixie? It is a very real possibility in the eyes of many residential-focused dealers.
“The difference (with Amazon) is their reach,” Chris Johnson, President of the Direct to Consumer Division of Brinks Home Security, said at a recent industry panel. “As much as we have seen of the SimpliSafe TV commercials, that reach is nothing compared to Amazon,” he adds. We need to figure out what our competitive advantage is, because the sky might actually be falling this time. It is not going to happen tomorrow or the next day – they are going to spend some time really getting this thing ramped up – but we need to figure out how to make the economics work.”
One need only stroll through a typical mall in America – where just about every Sears is closing up shop and other big and small retailers are holding going-out-of-business sales – to see the potential impact that Amazon can have on an industry; in fact, its ongoing evolution and disruption of various retail markets has its own foreboding moniker: The Amazon Effect.
When Amazon exerts its “effect” on a market segment, it can reshape the entire dynamic of an industry from a consumer shopping standpoint, while at the same time, creating tremendous pricing and margin pressure.
With “Ring Alarm” – which was made available for consumer purchase on July 4 – it seems on the surface that DIY mainstay SimpliSafe is the first target; but traditional home security providers have been put on notice. Amazon even says in its announcement that the system represents “independence and freedom” – presumably, from more costly traditional systems.
Inside The System
As a DIY product, Ring Alarm obviously does not require professional installation. Consumers need only connect the Base Station and Keypad to a home Wi-Fi, install contact sensor(s) on doors and/or windows, and appropriately place motion detectors. Coupled with monthly monitoring for just $10, alarm signals will be sent to a central monitoring station.
In all, a $199 basic package includes a base station, keypad, contact sensor (for a window or door), PIR motion detector, and range extender. Additional equipment – including a $30 First Alert combo smoke/CO detector – adds to the upfront cost. Ring plans to release additional products in the coming months, including a “Smoke and CO Listener” that enables mobile alerts; Flood and Freeze sensor; and a Dome Siren, which includes different chimes and volume levels that can be assigned to specific events.
“We don’t dispute that there is a market for cheaper, typically retail DIY-oriented security alternatives,” Alarm.com President and CEO Steve Trundle said during a recent earnings call. “This market is very competitive, and the (DIY) customer tends to be less interested in a comprehensive security system or a relationship with a service provider. They tend to be more price sensitive and interested in solving a specific, narrow monitoring or automation need. Because the lifetime value of these customer relationships is much lower, if positive at all, the retail market is generally not appealing for our service provider partners.”
After making its acquisitions, the first major aspect of the Amazon Effect comes in the form of marketing. They obviously want consumers to know the Ring brand, with the goal of making them believe a Ring system is just as good – if not better – than SimpliSafe or the ones being offered by local and national residential security dealers.
“Don’t assume that the Ring product is apples-to-apples compared to what you can sell,” warns Philip Pearson, President of the Smart Home Consulting Group and former executive with DIY security company Frontpoint.
“(Amazon) wants the consumer to think that, but it is your job when speaking to consumers to remind them that it is not,” Pearson continues. “Regardless of who your interactive service provider is, your feature set will be better than what Ring will launch with – perhaps with the exception of the video doorbell. Don’t let (your customers and prospects) buy into that false equivalency.”
With that in mind, security dealers – just as they did when the MSOs joined the industry a few years ago – would be well-served to leverage the increased marketing dollars being spent. “There are many many millions of dollars being spent telling people they need security that was not being spent before,” Johnson says. “We can either participate in that market expansion by making some adjustments, or we can dig our heels in.”
Of course, nobody in the security dealer space can compete with the brand awareness of a company as large and capitalized as Amazon; however, on a smaller scale, ADT’s marketing has already proven an interesting statistic when it comes to local competition, according to Pearson.
“If you break it down into local markets, local companies outpace ADT from a brand awareness perspective,” he says. “(Dealers can) leverage that and double down on that local connection, because Amazon’s weakness is not going to be on price or fulfillment – they do that really well – but they don’t have the experience, and they don’t have great trust as more news comes out about listening and recording in the home (via Alexa).”
How Can They Offer $10 Monitoring?
In the residential security market, the cost of monitoring is the most visible manifestation of the Amazon Effect.
According to several internet reports (including Tinkertry and IPVM), the Ring Alarm system will be professionally monitored for $10 a month by Rapid Response. Any security dealer who has researched the pricing of third-party central station monitoring would acknowledge that Amazon is certainly going to eat a portion of the monitoring cost to gain market share.
But this is simply Amazon’s Standard Operating Procedure. According to a 2017 Forbes article, Amazon lost $7.2 billion on shipping costs in 2016, which, as writer Steve Dennis said, “puts retailers in the untenable position of choosing between ceding market share to Amazon or lowering their prices to uneconomic and unsustainable levels. Most have chosen the latter strategy and are paying the price.”
Traditional security dealers are not going to offer $10 monitoring and survive. “The answer is not going to be to match their pricing, because that’s just not going to be possible for any of us,” Pearson says. “Instead, think about what your competitive advantage is – we all need to double down on service, reputation, experience, and leverage our local connections.”
“On the monitoring side, all of the companies that are really being impacted by SimpliSafe and Amazon pricing…have to be very flexible now in the way they sell to customers,” Imperial Capital’s Jeff Kessler explained at a recent ESX session. “It isn’t just ‘do I go to $10 monitoring’ – it is about what I can offer for $25 or $30. We’ve had $15 to $25 monitoring out there for 30 years...do they offer (customers) more? (Dealers) have to give customers a reason to pay that much money or they will have to come down. In the residential business, in my opinion, the cost of monitoring to the end-user probably is going to come down a bit, while it likely will not on the commercial side.
“I don’t see Nest or Simplisafe or Amazon going into a home yet that has 45 zones,” Kessler continues. “I think there is going to be somewhat of a bifurcation as to who buys what type of system. That’s what you will be seeing on the residential side of these businesses – much more targeted marketing to those people who will more likely buy their system. The value proposition (is) worth a lot more when ADT (for example) gives you ADT Go and you entrust your whole family to it…isn’t that worth more than $15 a month? Or, we can monitor 60-70 zones and (Amazon) can only go up to 7-8 (zones) – isn’t that worth more in terms of monitoring?”
Changing the Market Dynamics
The marketing push that comes with the Amazon Effect should have a profound impact on the dynamics of the residential security space itself. More marketing leads to more awareness, and more awareness leads to more customers. It is not hard to see how the Amazon Effect could push the long-standing residential security penetration rate out of the 20-25 percent range and into the stratosphere.
“We have fought over that same 20-25 percent because the hardest part about selling an alarm system is convincing the customer that they need security,” Bryan Melancon, Southeast Region Home Security Operations Manager for Cox Communications, said during the recent industry panel. “When you start to see all these new players come in, it brings more recognition of our products to a broader base of people. When I started my company (Cutting Edge Solutions) back in 2007, I can’t tell you how many blank stares I got when I told people about home automation – they had no clue what it was. Today, there are very few people who don’t know what home automation or the connected home is about – it has brought a much broader group into this industry.”
“The threat is that they are coming in with a $10-a-month monitoring, but I do believe it is an opportunity, in that a lot of the products that they are offering allow us to go after this 80 percent of the market that we have never been able to hit, like the renter market,” says Thomas Nakatani, VP of IT in the Customer Monitoring Technology department at ADT Security. “It is a huge opportunity for all of us, and we should be looking at it that way by trying to tie into this advertising and buzz – but we have to look at the pricing very carefully and keep an eye on those margins.”
Another effect on the market dynamics is an expansion into the commercial security market by one-time pure-play residential companies, who may view the commercial segment as a more stable business proposition. ADT has led the charge in this area, acquiring Acme Security Systems, Aronson Security Group, Protec Inc., MSE Corporate Security and Gaston Security in the past 11 months. The company has also launched both commercial and residential cybersecurity services thanks to its acquisition of Datashield and a new partnership for phishing detection with Cofense.
“On the commercial side, you are (earning) more installation revenue and selling more products,” ADT CEO Tim Whall said on a recent earnings call (available at http://seekingalpha.com). “Then we bring a different level of services and service capability.”
Adds Kessler: “It is no secret that ADT’s management is moving toward commercial, where the value proposition to customers is very different…and where there is less risk that Amazon and Google can blur the trusted partner function.”
For many observers, one of the barriers to Amazon taking over the security industry is its inability to offer anything more than a DIY installation product – a task from which many home security and automation users tend to shy away.
Separate from the announced Ring Alarm system –which appears to be strictly DIY from an installation standpoint – Amazon in May rolled out five residential security packages providing varying layers of smart home and security technology.
According to its webpage, “all packages include installation, customization and training.” It goes on to say that when an Amazon technician “arrives at your front door...they will listen to your needs and customize your smart home package.”
This opens a huge can of worms for Amazon while potentially creating the side-effect of significant security industry consolidation. “Amazon Home Services” offers consumers professional services such as TV wall-mounting, grill assembly, house cleaning, etc.; however, as most security industry professionals know, a technician cannot simply show up somewhere and install a security system. Individuals and companies need a license to do so, and those vary widely on a state-by-state basis.
“Amazon is looking into installs and consultations in select areas, but as most of you who work in multiple states already know, that’s not going to fly in a lot of states,” Melancon says. “The licensing is so complex and so different among all the different states, it is just going to be a huge undertaking (for Amazon).”
“With regard to companies like Amazon that sell home security products online, the licensing requirements will depend on the state statutes and regulations in the states those systems are sold, and how the regulations address ‘sales’ of such systems,” explains Chris Heaton, VP of Advocacy and Public Affairs for the Electronic Security Association (ESA). “In states with very clear language requiring licensing on the sales of intrusion systems without regard to how the sales are made – door-to-door, online, telemarketing, etc. – it is prudent for any company selling to get the required license(s) rather than risk civil or criminal sanctions. In states where the statutory or regulatory language is unclear, it is best to contact the regulator in that state and get an authoritative opinion based on the business model of the company.”
It is unclear exactly where Amazon can legally install security systems as of this writing; however, Heaton has created a matrix with an overview of what states have statewide licensing, formal training, continuing education requirements and whether criminal background checks are required for personnel. Below are some of the highlights; more in-depth info is available for free for ESA members or for purchase by non-members at http://esaweb.org/slg):
- 37 states have some level of statewide licensing requirements for intrusion and 39 states have some form of statewide licensing for fire systems.
- 26 states have formal training requirements for intrusion systems.
- 32 states have some form of examination requirement for intrusion systems.
- 11 states have an apprenticeship requirement for intrusion systems.
- 19 states have continuing education requirements for intrusion systems.
- 26 states have a criminal background check requirements for certain personnel involved in intrusion systems.
Still, it is widely believed that if Amazon decides to roll out professional installation nationwide, the company has a few options: it can train, certify and license its technicians internally; it can partner with companies (security dealers) licensed in each state to provide installation services; or, it can make a major acquisition of a nationally-licensed security company. Obviously, each one could have huge ramifications.
“(Amazon acquiring a national dealer) would be huge and very detrimental to product manufacturers in this space – it would be as big a threat to the manufacturers as it is to the dealers in this space and even to the distributors,” explains Warren Hill, Product Marketing Manager for Interlogix. “It would be disruptive to the whole industry.”
“The licensing thing is an opportunity, but they are going to figure that out,” Pearson says. “If our differentiator is that we are licensed, I don’t think the consumer will ultimately care about that. As soon as you are arguing about licensing, you are losing – you don’t want to be fighting on technicalities.”
How to Compete
If the Amazon Effect can lead to going-out-of-business sales, what can our industry do? One solution, according to a few of the panelists cited, is to move residential security systems to a leased equipment model that somewhat mirrors the mobile phone industry.
“The economics of the business have to change in order to compete,” Brinks’ Johnson says. “Instead of free systems, let’s get $200-400 up front and go to a zero subsidized model…consumer financing partners will be a tool that will allow us to do that in a consumer-friendly way. The wireless companies have already conditioned our customers to be ready for this payment; and they have also conditioned them for zero-percent financing – it is just a matter of working out the model.
“Think about how the economics change for your business if you can get a few hundred dollars up front,” Johnson continues. “This is an important part of the equation as the monthly rate starts coming down. At Verizon, it is however much per month – I don’t pay for my phone outright, it just shows up on my bill.”
“It works for (the mobile phone industry) because of the expectation that in 2-3 years (the consumer) will want a new phone,” Pearson adds. “We are likely to start seeing that on the security and connected home side, where more and more technologies are entering the fray and customers are going to want them. Once the equipment is paid off, it is a great opportunity to offer them some of the new technology instead of reducing their monthly rate. Then it turns into a huge retention and renewal opportunity.”
There is also the obvious service and response advantage held by traditional security dealers. “You get the truck roll – you get the knowledge that if something goes wrong, you aren’t going to have to spend six hours on the phone with customer service or on their online help desk – somebody is going to come to your house and fix these things,” says Blake Kozak of IHS Markit.
Another aspect is the ability of security dealers to be able to offer the same – or in many cases better – level of technology. “Anyone who is out there just selling alarm systems is going to be left in the dust,” Melancon says. “We can offer great service all we want, but if you are not offering the same types of products, then you will be gone.”
This is where your interactive services provider comes into play, and Johnson says typical security dealers are not fully leveraging those capabilities. “We should all go back and revisit the features with interactive service providers – there are a lot of features and marketing resources we might not be leveraging because we have been focused on some of the basic service packages,” he says. “If you have to pay extra to get that, you might just have to take a little erosion on the margins to be able to enhance your offering and really sell it.”
Finally, the proliferation of so much new technology may mean that the DIY route is simply too difficult for many consumers. This is where a good security dealer can make headway.
“I’m not sure the last time you’ve been inside a Lowe’s, but many of them have opened these huge, interactive areas in the store with an array of smart home products,” explains Bruce Mungiguerra, SVP of Sales and Business Development for Nortek Security & Control. “Just walking in there is overwhelming even for me. Where would I even begin to figure out what is going to work with what? We as an industry have to continue to do more to educate the consumers as to the role that we play in the Internet of Things and how we can help make their lives easier.”
Paul Rothman is Editor-in-Chief of Security Dealer & Integrator (SD&I) magazine. Access the current issue, full archives and apply for a free subscription at www.secdealer.com.