Small, Midsized Security Dealers Threatened in Shifting Resi Market

Substantial growth in the residential space is projected for those providers that keep pace with the advancing home automation trend.

Content for SSI‘s February issue is now posted online, including the annual industry financial analysis I reported based on interviews with Jeff Kessler, managing director of Imperial Capital. There is much more from my discussions with him I want to share with you that didn’t make it into the printed article. In particular, a cautionary tale about the threat to small and medium-sized security dealers’ ability to compete in the fast-changing residential market.

Kessler is forecasting big-time growth in the residential space, driven by mass marketing of home automation and lifestyle enhancement products and services. Currently, the residential security pie is estimated to be about 25 million homes. Kessler believes that pie is going to expand to more than 55 million homes by 2020. Which providers will grab the lion’s share of that overall growth is up for debate. Kessler has a strong opinion about which companies are best suited to win. It is an opinion considered controversial among many traditional security stakeholders, but not so much by investors outside the industry who largely agree with his prediction of how the battle for market share will play out. 

Following is an abridged version of Imperial Capital’s projections:

Of the estimated 25 million homes with security systems, roughly 22-23 million of them are serviced by traditional security companies. The remainder breaks down as such: 500,000 to 600,000 homeowners have systems procured from cablecos and telecoms; and, roughly one million to two million homes are outfitted with DIY-type systems from companies such as Protect America.

Without question there are traditional security companies that compete strongly against the likes of Comcast. And yet cablecos and telecoms are projected to grow their current position to upward of 20 million homes just because they can, Kessler says. They just simply have access to so very many homes. Hence, many a consumer is expected to bundle security and home controls without much thought about comparison shopping in part because the systems will be priced very competitively, no matter how good or bad they are.

DIY is projected to increase from its current position to about three or four million homes. The do-it-yourself ceiling will be limited by consumers’ decision on whether or not to have a monitored system, Kessler says. 

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The market share held by the top 20 to 30 alarm companies is projected to grow from about 11 million to possibly 20 million homes over the course of the next five to six years. Conversely, the balance of the dealer population that does not supplement their portfolios with a home automation offering or wireless system capability will be the ones disintermediated from the marketplace and therefore suffer perilous client loss.

Kessler believes the market share currently held by this large group of exposed traditional companies will fall from about 13 million homes down to six million to eight million homes. Traditional security stakeholders opine Kessler’s projections are unfounded. Surely these independent companies will find ways of marketing the quality assurance angle to persuade customers, and therefore ward off new entrants that are less concerned about top-notch customer service. After all, some have taken a run at the industry before only to bail. 

Kessler rebuts, however, the quality assurance angle is only an advantage if all other parts of the equation are equal. Meaning: Only those security providers that offer home automation and related Internet-based services for small businesses – and do all these things equal to or better than what cablecos/telcos are providing, even though their pricing may be higher – will be positioned to grow.

To flesh out this scenario further, Imperial Capital projects the top 20 to 30 alarm companies will grow their customer base at a compound annual growth rate (CAGR) of about 6.5% over the next five to six years, before factoring average revenue per unit (ARPU) or recurring monthly revenue (RMR) growth.

Kessler believes this upper echelon of the alarm industry is going to continue flourishing – not performing spectacularly, he says, but will do so consistently – and not be kicked to the curb. What concerns him is the smaller alarm company owner who isn’t investing for the future and continues to run the business just above attrition. They have built a business that affords them a great lifestyle, but now that foundation is threatened. Consider that even before overhauling their business model to keep pace with the connected home market, many companies are yet to invest much in cellular infrastructure and face a 2G to 3G upgrade.

Add up all the competitive shortcomings and a grave threat does indeed appear all too real. Some may believe Kessler is too pessimistic about these companies’ ability to adapt, but therein lies the challenge. Adapt or be beat out.

Still, Kessler suggests the security industry is better positioned than cablecos, telecos or DIYers in its ability to maintain a recurring revenue stream off of home automation and related services. For those companies that increasingly offer more consumer-desired services, they can expect their value proposition to go up with customers. Factor in alarm verification capabilities, especially in municipalities that demand verification for a response, and the relationship is forged even stronger. 

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It’s all about creating a stickier customer. For the better security providers, Kessler says he would be not surprised to see customer retention go from about seven years to double digits. As well, attrition rates can be expected to continue ticking downward for large companies where they have been flat or slightly elevated during the last several years.

As the industry transitions from POTS-based systems to digital systems – offered at price points that afford increasingly better value – customers can be expected to spend money and stay with a company for the long haul. That will be particularly true, Kessler suggests, when PERS moves from “I’ve fallen and can’t get up” pendants and becomes part of a whole home monitoring system.

Are you situated for success in the new paradigm?

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About the Author


Although Bosch’s name is quite familiar to those in the security industry, his previous experience has been in daily newspaper journalism. Prior to joining SECURITY SALES & INTEGRATION in 2006, he spent 15 years with the Los Angeles Times, where he performed a wide assortment of editorial responsibilities, including feature and metro department assignments as well as content producing for Bosch is a graduate of California State University, Fresno with a degree in Mass Communication & Journalism. In 2007, he successfully completed the National Burglar and Fire Alarm Association’s National Training School coursework to become a Certified Level I Alarm Technician.

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