â€œThereâ€™s been a reset for the entire industry,â€ said David Robinson, president of ADTâ€™s parent Tyco Fire & Security. Costs to acquire home alarm accounts â€œwere far too high,â€ and the program that recruited independent dealers to install ADTâ€™s home alarms proved â€œnot economically viable in certain marketsâ€ for the market leader.
â€œOn an economic model basis it didnâ€™t make sense,â€ said Robinson, who joined Tyco last year. â€œIt was overaggressive.â€
Now ADT has focused its growth strategy to require higher customer credit scores, higher installation fees, external financing sources, and a more selective dealer program.
â€œOur dealer program spending is down 70% now versus 2002,â€ said Robinson.
ADTâ€™s former vice president of acquisitions and corporate development, Dennis Stern, now co-chairs Buchanan Ingersollâ€™s Security Alarm Group. â€œThe mass market was a worthwhile way to generate RMR, but a very high cancellation rate came into that,â€ he said. â€œIf you were a long-term player, that was not the way to grow your company.â€
Now Stern points to concern about the September 11 attacks and bills pending in Congress that â€œwill increase the focus on security spending and security procedures on the business campus.â€
As senior vice president in Lehman Brothersâ€™ Business & Professional Services Group, Greg Bortz aided the sale of Edison Select to ADT and divestiture of Protection Oneâ€™s Mobile Services Group.
â€œThis is an industry that has destroyed a tremendous amount of shareholder value,â€ he said. â€œFinancial markets provided alarm companies with financingâ€œ without proper constraints. Bortz named â€œzero downâ€ sales and low credit scores as prime culprits. â€œIt was more important to grow.â€
â€œThe industry has been in fix-it mode for a while now,â€ Bortz said, â€œGreater opportunities lie ahead in a much healthier, more sustainable environment.â€
Sean Forrest, senior vice president and division head at LaSalle National Bank, has been lending to alarm companies since 1995. Despite some problem loans, he said the industry has avoided washouts and found ways to retain residential accounts. â€œAttrition can be managed if companies are focused on quality and service,â€ Forrest said.
Active in more than 200 security alarm acquisitions, Mike Barnes of Barnes Associates is convinced that mass marketing still has a future. â€œIs mass marketing a failed model? No,â€ Barnes said. â€œItâ€™s clearly in disfavor right now,â€ Barnes said, but â€œthe industry has proven itâ€™s a valid way to increase penetration rates in Middle America. Itâ€™s probably the only way. If the industry relies on custom (design for security systems) it will be in for anemic growth,â€ he warned.
â€œAbsolutely, you have to have increased sophistication and effort in attrition management and tracking in order to raise capital and make money,â€ Barnes said.
â€Sometime in the next five years, weâ€™ll be back to giving systems away.â€ And he added, â€œIf itâ€™s done properly, the dealer program model works.â€