It would appear that all of the arrows point against the status quo.

Each year, the SDM Industry Forecast Survey reveals the keys to your success for the coming year. Without fail, the results are optimistic at worst. RMR will grow. Product sales will grow. Costs will remain low and profits strong. To be fair, as business owners you note these will be great challenges for your organization, but you anticipate success.

It would appear that all of the arrows point against the status quo. For example, with residential construction down, housing vacancies and foreclosures up and the consumer cutting expenses, it would seem that RMR attrition would be high and RMR multiples low. And while business necessity requires monitoring, there are many vacancies in offices and retail locations that indicate weakness for monitoring contracts.

Yet, we have witnessed two of the largest companies, Broadview and Niscayah (the latter not yet final) acquired at premium prices during the past few years. Both are major players and reached the No. 2 spot and No. 8 spot on the SDM 100 Report and Top Systems Integrators Report, respectively, at the time of their acquisition.

At the same time, there is increased competition and in some cases price wars for wholesale accounts. You would not expect that to lead to premium takeover pricing, but that appears to be the trend. What do you make of economic reality being at odds with this consolidation at the top?

Crime

Crime is down, but business is up. That, too, would seem at odds with conventional wisdom. But there is a reality to this yin-yang situation. Since 9/11 and Katrina, there has been a huge investment in security to prevent crime and reduce losses. One reason crime is down is simply because it is harder to steal stuff. For example, looting was rampant during Katrina. But business resilience planning in the “new” New Orleans would make looting far more difficult under similar circumstances today.

Second, the insurance requirements and cost benefits of compliance outweigh the cost of the security investment. C-suites are recognizing that brand protection is key and that good risk management results in higher employee productivity, customer loyalty and profitability.

Third, our industry has invented a lot of affordable, logical to install, service solutions. For example, copper wire theft was an unsolvable problem short of hiring a 24/7 guard a few years ago. Now there are affordable technology solutions to monitor, analyze and alert property owners and security practitioners of intrusions and risks. Usually the result protects the assets and leads to an arrest.

Competition

New entrants into our market include IT, phone and cable companies. IBM’s converged access control solution is going straight through the IT channel and ties identity to its database for both the network and physical entrances.

Verizon and Comcast are selling security monitoring services to the residential and business markets, but their impact on the current leaders is non-existent. In fact, their marketing may actually increase product awareness and therefore the penetration rate from the historic 23 percent range. While ADT has been the $4.4 billion elephant in the room heavily promoting our industry’s value to customers, having Verizon enter at the $100 billion revenue level adds a lot of marketing power. More homeowners will be thinking security/life safety — like electricity — is a must have.

While the impact on the manufacturers may be negative, channel companies that educate themselves and embrace new technologies will be rewarded. But I respectfully suggest they “embrace” at a faster pace than they did IP.

Margin pressure is real. As security products become more IT-ized, the margins will continue to shrink. Most IT products are marked up about 4 percent. But the IT channel makes its money on service contracts and software licenses. Similar to the security industry, the service model will continue to drive profitability away from cost plus. Customers will see the value in service levels.

What do you see in the coming months to a year for the security economy? Let us know by writing to the Editor at stepanekl@bnpmedia.com.

Inside This Issue

Commemorating the 10th anniversary of 9/11, SDM brings its readers a report from the new World Trade Center, where Diebold Enterprise Security is bringing together multiple buildings with myriad functionality under a single software platform that integrates best-of-breed solutions.