Report: Expect a Fragmented Security Industry, Not More Consolidation

AUSTIN, Texas — Fueled by a global industry for physical security equipment and services estimated to be worth $110 billion in 2012, some industry analysts have predicted that manufacturers would consolidate as the market matures. Not so according to a new report from research firm IHS, which instead predicts competition will drive the market and cause the industry to become more fragmented.

The report, “Total Physical Security Equipment and Services – 2013” notes that the Americas generated $46 billion in revenue last year — 41% of global physical security equipment and services market. Asia followed with $33 billion, trailed by the collective Europe-Middle East-Africa (EMEA) region with $29 billion. IHS forecasts strong growth in all the markets for the next few years.

“This is an industry that managed to stay strong during the recession,” IHS Senior Analyst David Green says. “Now with the general improvement in the global economy, we expect total industry revenue to reach $170 billion a year by 2017, even though growth rates will probably peak before then.”

Those estimated numbers have sparked questions on whether the industry will consolidate. A theory supported by many within the industry suggests that as markets age, manufacturers will merge until a select few dominate the supply. However, IHS researchers suggest this may not transpire given the level of competition and the current fragmentation of the market.

For example, only two entities broke the $2 billion level in annual revenue, with both accounting for a combined market share of 10%. Behind them, only five other companies possess a market share of 1% or higher. In fact, the top 15 companies together only managed a market share of just above 20%, with the remainder of the market — more than 78% — up for grabs among thousands of other companies, according to the report.

The equipment market shows a similar story, with a very shallow curve to the market share table. In all, about 40 players in the space achieved revenue in excess of $100 million a year in 2012.

“It’s extremely competitive in every vertical, product and region,” Green explains. “You have several companies that are offering virtually the same product in specification and price, yet the highly personal nature of security sales means that each company can claim its own little niche within the market.”

With the split of Tyco Int’l — one of the largest companies represented in the 2012 data — into ADT, Tyco Integrated Security and Pentair Ltd. as separate publicly traded companies, the service market is also set to become even more fragmented in the near-term, IHS predicts.

The report accounts for the inevitably of mergers and acquisitions in the physical security market, especially on the products side, but not with the impact many might see in other markets. For a company to make significant moves up the market share table, it would realistically need the combined share of five or more existing manufacturers.

“That’s just not going to happen overnight — this is not an industry where one acquisition propels you straight to the top,” Green says.

There is still a general expectation that in the long-term, a select few will start to dominate the industry, but it will be a much slower process than traditional market economy studies predict.

“Yes, it defies accepted market logic to some extent,” Green says. “But then at $110 billion and beating the recession, it’s hardly a typical industry anyway.”

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