State of the Market: Video Surveillance 2009
Drew Chernoy, director of financial and business development for Scarsdale, N.Y.-based installing company Scarsdale Security, expects 2009 to be a good year for sales of video surveillance systems. Although the company sold fewer video projects in early 2009 compared with the same period a year ago, Chernoy expects sales to improve soon.
“Come springtime, all of the shock factors that are out there will be over,” he predicts. Chernoy points to what he calls the “spring training phenomenon.” He believes many potential buyers fear the economy will be worse than it really will be, and they have a wait-and-see attitude towards system purchases. But once the new presidential administration is settled in, he believes buyers will feel less uncertainty.
“There’s been a general freezing of decision-making but we’re seeing that thaw,” he says. To help overcome buyer uncertainty, Chernoy says, “We’re making sure all of our employees know about our sales successes.” The company formalized its communications processes somewhat, Chernoy relates. “We’re encouraging people to better understand the successes we are getting and making them aware of things they can do to improve the health of the company.” For example, technicians are making an extra effort to ensure that they have replacement parts with them to minimize the need to make repeated service calls to customers.
Despite the challenges of today’s market, Chernoy sees numerous sales opportunities involving video surveillance. “We try to sell remote monitoring every time,” he says. “The best sales pitch is seeing it in action.” The company now monitors about 200 sites, up from just a handful of sites a year or so ago. These customers see value in having employees know that someone is watching them, Chernoy says. The company also has identified a new opportunity to sell off-site video storage now that some perpetrators have begun stealing digital video recorders and the potentially incriminating evidence they contain.
Chernoy adds that, despite increased customer belt-tightening, smart companies realize they shouldn’t skimp on security. “Good companies are still concerned about loss prevention and employee safety. They want to document what happens in their parking lot.”
Some customers are doing more comparison shopping â€” and that can work to the benefit of an established company such as Scarsdale Security. “There’s a lot of switching going on and that’s a big opportunity for us,” Chernoy admits.
Fortunately competition hasn’t gotten tough enough to impact profit margins, however. “Our revenue per job hasn’t changed and our margins are about the same,” he notes.
SALES UPS & DOWNSNot everyone expects to see a turnaround as quickly as Chernoy does. “Right now we’re still riding some of the residual effect of 2008 because some contracts were not complete,” says Edward Goldberg, president of Alscan, a Birmingham, Ala.-based systems integrator. “But when they are it may be kind of difficult.”
In today’s economy, many customers are having difficulty obtaining loans and have had to prioritize spending â€” and new investment in security often is not a top priority, Goldberg says. “This will be a problem for the next six months,” he predicts.
Joseph Riotto, president of Fairfield, N.J.-based Advanced Video Surveillance is one of two video installation companies interviewed for this article that has seen a revenue uptick in the first part of 2009. He cautions, however, that growth could slow. “Some customers are still working on their 2008 budget or surplus,” he notes. “They will cut back, but it hasn’t happened yet.”
Another company that has seen a strong start to 2009 is Indianapolis-based Koorsen Fire & Security. That company’s revenue is up between 15 percent and 20 percent compared to a year ago, and its total number of jobs is up about 10 percent. As with Advanced Video Surveillance, the strong start may be due, in part, to a residual effect from 2008. “We had a couple of large construction projects that we sold a year ago,” notes Skip Sampson, vice president of security integration for Koorsen.
Nevertheless, Sampson is one of only two installing company executives SDM interviewed who expects 2009 to be “very good to excellent.” He expects Koorsen to continue to have strong video sales, in part, because of the success the company has had with an outside telemarketing firm. “They’ve helped us get to the decision makers on the video side,” Sampson explains. “There are a lot of people who are looking to supplement their security with video, especially for securing outside areas.”
The other installing company that expects 2009 to be “very good to excellent” is Unlimited Technology, a Chester Springs, Pa.-based systems integrator that specializes in protecting critical infrastructure. Homeland Security will continue to roll out money for buffer zone protection for the next three years, states Brent Franklin, Unlimited Technology’s president. The company has seen sales of a thermal imaging system from Atlanta-based Vumii increase between three-fold and four-fold, reveal’s Unlimited Technology’s CEO, Ian Francisco. Like Koorsen, Unlimited Technology also has been able to bring in new customers through telemarketing.
While most dealers and integrators interviewed for this article say their average-revenue-per-job has stayed the same, Advanced Video Surveillance has seen revenue-per-job increase in comparison with a year ago. “The size of our projects is increasing because we’re trying to really focus on larger corporations and municipalities,” Riotto explains.
Riotto sees greater opportunity among larger customers than smaller ones. “The frequency of people calling for small jobs is down; that market seems to have dried up,” he claims, adding that people who own their own businesses are more likely to decrease security spending than corporate employees whose spending decisions do not involve their own personal money.
But just as industry sources disagree on the timing of an industry recovery, they also disagree on where the market’s strong and soft spots are. Scott Harkins, vice president and general manager for the video arm of Louisville, Ky.-based equipment manufacturer Honeywell Systems Group, sees the greatest softness at the higher end of the market. Noting that larger companies are the ones most adversely impacted by the tightening of credit, Harkins says, “The small to medium customer has more upside for 2009 than the large-scale customer.”
As for specific vertical markets, many sources point to health care, government and educational markets as having the most potential for sales in 2009. Francisco adds several less recognized opportunities to the list. Correctional facilities are a strong growth area, as are nuclear plants, he says.
Some sources say the retail market will be soft because it is one of the hardest hit by the economic downturn. But Harkins disagrees. “Retailers from casual dining up through Big Box stores can’t entirely reduce security spending even in difficult times.”
Those retailers operate on such tight margins that reducing security spending is not an option, adds Eric Zei, director of marketing for Honeywell’s Video Systems business. “They have to control loss and shrinkage,” he says. “If they don’t control it, they’ll cease to exist.”
Pat Egan, president of Lancaster, Pa.-based installing company Select Security, notes some other changes impacting video surveillance sales. “We’re seeing a longer time for an account executive to close the deal and seeing the time between orders longer. The sales cycle has extended and the size of the deal is smaller, which dictates a shorter installation time.”
As a result, Egan says, “We have 26 installation crews and about half the backlog we had last year at this time.” Select Security’s video business has been affected less adversely than its intrusion protection business, however. “We will do much more video and access control work in 2009 as a percentage of our total installations,” Egan notes.
Recent research for the Security Industry Association corroborates Egan’s observation that the video market is holding up better than the intrusion protection market. SIA estimates that the annual growth rate for video surveillance for 2008 was 6.7 percent and that the growth rate for 2009 will be 4.9 percent. In comparison, SIA estimates that the growth rate for intrusion detection, which was 6.4 percent in 2008, will be only 0.2 percent in 2009. The differential growth rates are not surprising when penetrations for the two technologies are considered. While 75 percent of security systems already include intrusion/fire detection, only 52 percent have video surveillance, SIA’s study found.
MAINTAINING MARGINSEgan has found customers to be substantially more price-sensitive since the economy took a downturn last year. Select Security lost a potential $1,800 video deal because the company’s quote was $28 higher than a competitor’s â€” even though the customer was experiencing problems with the competitor.
“We’re seeing more questions about third-party leasing and people are asking if we have any refurbished equipment,” Egan says. Some customers also have reduced the number of cameras on a job and have opted to pre-wire for them instead.
“Customers are willing to sacrifice some quality for price right now,” notes Egan, who cites the example of a college that purchased a lower-resolution video solution because funding was being squeezed.
Although conditions such as these haven’t caused margins to drop for Select or some other companies that do video work, sources say it’s an area they’re watching closely. “We are very sensitive to maintaining a strong margin,” Egan comments. “We’d rather not do a job than take a narrower margin.”
The only exception, he says, is when a service contract is involved. In that case, “We may be willing to sacrifice a bit of margin for a long-term service contract and recover our margin over time,” Egan explains.
Several sources note that labor costs have increased, but have been offset by decreases in equipment costs. Most equipment makers interviewed for this article expect their prices to remain stable, although Adrian Parvulescu, national engineering manager for security products for Wayne, N.J.-based JVC Professional, believes that some manufacturers may need to raise prices in response to changes in currency exchange rates.
One security dealer that has seen margins on video installations drop somewhat is Koorsen Fire and Security. “We’re really challenged on the margin side on equipment,” Sampson says. “We see the information technology model coming in where you don’t get as much margin on the equipment but you make it up on managed services.”
Koorsen salespeople propose managed video services “all the time,” Sampson says. “Some customers understand it and buy in and others don’t yet.” He expects managed video services to eventually become more popular, once a “snowball effect” begins to occur.
Riotto cautions that installation company margins could come under pressure if competitors become desperate. “If they start getting hurt and lowering prices, margins will have to decline,” he says. “Some of our public bids are coming in lower than they normally do.”
A prolonged or severe downturn, however, could weed out some of the weakest competitors, which ultimately could cause margins to widen, Goldberg notes.
Most of the manufacturers interviewed expect video equipment sales to increase in 2009. Axis Communications (Chelmsford, Mass.), Digimerge (Markham, Ont.), JVC and Speco Technologies (Amityville, N.Y.) all expect spending on video technology research and development to remain steady or increase for 2009. Representatives of all four companies also say they expect payroll levels to stay the same or increase in 2009. Any increase will be across the board, representatives say.
But although R&D may take place in North America, manufacturing has largely moved offshore. For example, Axis does most of its manufacturing in Sweden, Poland and Thailand, while Digimerge products are primarily built in Korea. Honeywell does its video manufacturing in China, while Speco builds its video products in Korea and JVC’s video products are built in Japan and Thailand.
GROWTH FACTORSWhile the general economy is surely the biggest factor that will affect the video surveillance market in 2009, other factors also could have an impact.
Several sources interviewed for this article see the rise of video systems based on the Internet protocol (IP) as a positive factor. Although the percentage of systems that use IP cameras is still quite small â€” less than 10 percent by most estimates â€” virtually all agree that IP video is one of the strongest growth areas within the general category of video surveillance.
ScanSource Security, a Greenville, S.C.-based equipment distributor that specializes in IP video, experienced a double-digit increase in sales of that product line in 2008. Axis Communications, a manufacturer that only offers IP video, has seen sales increases in the range of 40 percent over the last two years. Fairport, N.Y.-based equipment manufacturer Bosch Security Systems has had its IP video business nearly double.
“The IP business is exploding, with flagship products like our AutoDome Modular IP Cameras experiencing a sales increase of more than 160 percent last year,” Bosch president of sales Jeremy Hockham told attendees at Bosch’s national sales meeting in Las Vegas in January.
This growth is particularly impressive considering that higher costs restrict IP cameras primarily to large jobs. “If you go above 40 cameras, the cost is lower for IP,” notes Fredrik Nilsson, general manager for North American operations for Axis. “If there is an end user with a set budget of $100,000 and someone comes in below that because they are using IP, the end user expands the system,” Nilsson says. The net effect, he says, is an increase in the total number of cameras sold. “It could take three to 10 years, but eventually it will be all IP,” Nilsson predicts.
Sampson thinks the higher price of IP video will have a stabilizing effect on the average dollar value of Koorsen’s video installations. “We’re losing some revenue on the analog side as prices came down, but IP has brought the cost to the customer back up and we’re doing more and more of that,” Sampson relates.
Along with the rise of IP video has come the rise of the high-resolution megapixel camera â€” and Riotto has seen strong interest on the part of customers in megapixel technology. “People are starting to look for better and better systems and they’re doing upgrades sooner,” he says.
Francisco sees megapixel technology driving a need for greater storage capacity, which also could drive up average system value. “Storage has come down in cost, but the cost will go up again if you add megapixel technology,” he says.
IP video may benefit from technology advances in the broader â€” and larger â€” IP and information technology market. Wayne Hurd, executive vice president of sales and marketing for Digimerge, points to the example of digital video input (DVI) technology originally developed for the entertainment video market, which he expects to find its way into surveillance video. “It will enable digital-to-digital transmission from a DVR to a flat-screen television to provide a much clearer picture,” Hurd explains.
One factor that continues to hobble IP video sales, however, is a lack of open architecture standards, several sources say â€” and most don’t envision much change in that area any time soon. “It’s a nice word but it doesn’t mean diddly,” Chernoy comments. “Every DVR maker gives you a list of which cameras do and don’t work and which ones you do and don’t have iris control over. I’m a big supporter of open standards, but every manufacturer has a prize to protect. Sometimes, when you want the best feature, it really only works with their widget.”
Several developments on the regulatory front could impact video surveillance system sales. Some municipalities still have ordinances that require alarms to be verified before police are dispatched; video remains one of the most practical alternatives for meeting that requirement. Riotto also anticipates stronger enforcement of existing licensing laws, which could help shift business towards licensed video installation companies.
Traditional security companies may continue to face new types of competitors, however. “We’re getting a lot of structured wiring companies saying they can put in cameras,” Riotto observes.
Gary Perlin, vice president of video products for Speco Technologies, also notes new competition from Verizon’s broadband FiOS service, which includes video camera monitoring among its capabilities. Perlin thinks, however, that “Most people won’t go to their phone company for a professional security system.”
MOVING FORWARDDespite challenges such as these, many security businesses are uncovering new opportunities in the video surveillance market. For example, SDM’s 2009 Forecast Study indicates that 23 percent of security businesses offer remote video monitoring, with an average monthly monitoring price of $180.
Jim Lovinggood, general manager for Blue Ridge Security, an Anderson, S.C.-based security dealer, is enthusiastic about a product called Videofied from White Bear Lake, Minn.-based RSI Video Technologies. The stand-alone video camera can be used indoors or outdoors and has internal motion detection. As Lovinggood explains, “When someone trips the camera, it sends a video snippet to the central station, where operators can look at the event and make a decision whether it’s a true burglary or a situation that needs to be dealt with.” It’s a good solution for protecting outdoor assets containing copper, which have seen high theft levels recently, Lovinggood says.
“In a typical video system, you would review the video the next day after the damage was done,” he explains. “This is a little more proactive. We’re able to tie it into our central station and make it part of our services. In most cases the customer had some kind of alarm system, but where they needed coverage was not part of their traditional system.”
Blue Ridge did some direct-mail promotions to support Videofied sales in 2008 and expects to do more in 2009 to support all of the company’s products and services, Lovinggood says.
Another company that sees an upside to investing in marketing is Select Security, although Egan notes changes in how those dollars are spent. “We’ve made a significant deinvestment in Yellow Pages advertising; the phone book is best suited to keep your old car from rolling out of the garage,” he says. “We’re moving our marketing to the Internet. We put a lot of money into graphic design and Web blogging and getting our site to pop up first on search engines to generate leads.”
Paul Constantine, vice president of merchandising for ScanSource, believes an opportunity is emerging in what he calls “hardware as a service.” In the traditional IT world, some companies prefer to pay for equipment through a monthly fee that also may include a maintenance and service agreement. “The equipment is still owned by the dealer and the end user never takes formal title,” explains Constantine, who believes this model may migrate to the security world now that end users are trying to avoid large upfront cash outlays for equipment.
To help support video installation companies, which may be feeling a cash strain, ScanSource also is considering offering creative financing options. “We have a complete reseller financial services team that is taking a proactive approach tocredit terms,” notes Tony Sorrentino, vice president of sales for ScanSource. “We’ve done some 90-day interest-free programs to make it easier for dealers to improve their cash flow.”
Sorrentino and others also point to expanded uses for video surveillance equipment that can help end users justify the investment. Manufacturing companies may be able to use surveillance video to help ensure that quality standards are met â€” and retailers may be able to use the technology to ensure that all locations set up displays consistently.
By adding video analytics, companies can generate an even greater return on their investment, Harkins notes. Retailers, for example, could use video analytics to determine which way customers tend to turn when they walk into a location or how long, on average, customers stand in front of a display.
Finally, like the proverbial “ill wind,” economic pressures also can generate opportunities for video surveillance sales. “When you’re looking at the dollar cost of a camera, it used to be a supplement to a guard,” Riotto says. “Now a lot of people are looking at it as taking the place of a guard. It’s a one-time charge rather than salaries and benefits. We’re seeing companies turning to technology to do a better job and cut down on payroll.”
Although growth in video surveillance sales is expected to be slower than in previous years, 2009 still can prove solid and profitable if dealers and integrators take steps to overcome economic challenges. Make sure to communicate to both employees and prospects the success stories involving video surveillance. Focus your efforts on specific market segments such as healthcare, government, education, correctional, and power plants; as well as smaller businesses that place a high priority on loss prevention and employee and customer safety. Incorporate into your offerings technologies that solve specific problems, such as motion-activated video systems for perimeters, megapixel cameras for superb detail, and video analytics for security and business management. Offer managed services, such as remote video monitoring and hardware as a service. In your sales presentations, make sure your sales reps are demonstrating return-on-investment to help customers justify their expenditures. And finally, consider some creative financing options to make it easier for customers to say “yes.”
SIDEBAR: SDM Asked: â€˜What Impact Will the Obama Administration Have on the Video Surveillance Market?“He has an $850 million stimulus package and if the money happens â€” and flows to the programs he’s aiming for â€” such as highways and nuclear plants, many of those have strong security requirements.” â€” Scott Harkins, Honeywell Systems Group
“I could see a positive effect. In December I thought it would kill business, but he’s backed off and now wants to give business a tax break. There will be money for security and we will face new security challenges under his administration.” â€” Gary Perlin, Speco Technologies
“There will be no negative effect. Obama is as serious as Bush was about homeland security and it will still be an issue.” â€” Wayne Hurd, Digimerge Technologies
“It depends what happens internationally. We may see something going on with homeland security and the administration may step in and provide funding.” â€” Adrian Parvulescu, JVC Professional
“He will want to spend more money on infrastructure and you also want to make sure you protect that infrastructure.” â€” Fredrik Nilsson, Axis
SIDEBAR: SDM Asked: â€˜What Is the Greatest Challenge Your Company Faces in the Video Surveillance Business and How Are You Tackling It?â€™“Customers who think the economy is going to be worse than it is. We’re making sure all of our employees know about our sales successes.” â€” Drew Chernoy, Scarsdale Security
“Rapidly changing products and continuing to keep up with training. We’re slow to react and quick to embrace. We don’t react to every new thing, but when we find something, we embrace it, roll it out and train for it. We’re also relying more on the manufacturer to help.” â€” Pat Egan, Select Security
“Staying competitive and still meeting the needs of our clients. We’re constantly looking for new personnel. What we’re looking to do is hire more people to expand the base of employees to continue to provide the service our customers have come to expect.” â€” Joseph Riotto, Advanced Video Surveillance
“Keeping up with equipment and convergence. There are courses available from vendors and associations. Another big issue will be the availability of funding. For most of the big jobs, we don’t get the bulk of the money until the end. Financing this operation could become a challenge. Our bank has been supportive. I hope we won’t have to shop around.” â€” Edward Goldberg, Alscan
“Weeding out the real technology from the vaporware. We bring it in and run it through rigorous testing. And we limit the amount of product we sell so we can continue to support and understand all nuances of the product.” â€” Brent Franklin, Unlimited Technology
“Finding and retaining quality employees. We’re very selective in hiring. We do a lot of testing on the front end. We like our salespeople to have certification from ASIS or CPP.” â€” Skip Sampson, Koorsen Fire & Security
“There are a growing number of people that are not traditional alarm companies getting into the video portion of our business. We preach the concept of an integrated system and products and services and how they can work together to provide a solution that the customer needs.” â€” Jim Lovinggood, Blue Ridge Security Systems