Signs point to growth in the alarm market, but with the potential for more players ultimately to win consumers’ dollars.
In this month’s cover story, “Who Gets the Money?” SDM’s senior editor Heather Klotz-Young succinctly points out that the State of the Alarm Systems Market is good and getting better. With new players such as AT&T, Comcast, Verizon, Cox and, potentially, Google, as well as a do-it-yourself market, which some think is growing three times as fast as the professionally installed market, who wouldn’t consider security an attractive market and wonder, Who are the winners going to be? Who gets the money?
As our industry is poised on the brink of change and growth in so many different ways, analyzing this change and scrutinizing the new competition is a topic that comes up regularly, as it did during several industry events that took place during the first quarter of this year. At the 19th annual Barnes Buchanan Conference held in early February, Michael Barnes, founding partner of Barnes Associates, as part of his “Industry & Market Overview” presentation, explained why security is an appealing market for these giants (sticky customers with low attrition, for one).
Barnes also put forth one of the most interesting competitive analyses, focused on two potential scenarios for how it may play out for the telcos and cable companies, summing up how these companies may fare and what the end result may be for many of them.
In the “In and Out” scenario, consumer skepticism prevails because the average consumer is not convinced that their cable or telephone provider can deliver the super high-quality service demanded by the critical function of security. The perception of most people is that cable or phone companies are not the most user-friendly, highly responsive businesses, Barnes said. These new competitors also learn that their existing customer base is not as great an advantage as they thought it would be and does not offer returns in terms of higher take rates. Another negative factor in the “In and Out” scenario is that the new players may find there is no advantage to offering security as part of a bundled offering because they cannot compete on price due to having similar operating costs as a traditional player. Finally, as they find there is a slow build in customer numbers, along with very little earnings and diluted cash flow, they lose interest and exit the industry. “They may have success, but you have to define success by their size requirements,” Barnes said.
In the “Game Changer” scenario, consumers embrace the offerings of the telcos and cable companies because their marketing message of an enhanced lifestyle has appeal, especially with components such as automated lighting, residential video, and interactive services. The new competitors find that a sizable percentage of their existing customer base is interested in purchasing security. In this scenario, the telco and cable providers learn that not only does security give them a lower churn rate, but when they attach security to their overall bundled offering, it actually brings the attrition rate down on their core offering. “At the end of the day, if they can say, ‘The value of my core customer goes up by $1,000 by attaching security to it,’ that is a very distinct competitive advantage,” Barnes said. That cost advantage, plus the value of the attrition, could potentially be offered back to the customer in the form of lower pricing — thereby becoming a game changer by destroying the economics for traditional security dealers. In this scenario, it is likely that one of the companies could buy ADT, instantly becoming the single-largest player in the industry. These companies also have the wherewithal to introduce their own slick, proprietary product line.
Most security professionals have an opinion on which of these outcomes (or another) is more likely to happen — weak competitors that exit within just a few years in the In-and-Out scenario or serious long-term competitors in the Game Changer scenario. What is your opinion? Share it with the industry by taking SDM’s poll on the home page at www.SDMmag.com.
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