Inside the Smart Home & Beyond With Tim Whall at CAA Winter Conference
SSI Senior Editor Rodney Bosch hosted an in-depth discussion with SSI Industry Hall of Famer Whall, encompassing residential market opportunities, no-term contracts and more.
Tim Whall, left, with SSI Senior Editor Rodney Bosch.
SAN FRANCISCO — SSI Industry Hall of Famer Tim Whall, who retired as CEO of ADT at the end of last month, dispensed insights and good counsel during a featured appearance at the California Alarm Association’s winter conference, held here (Dec. 5-8) at the luxurious Fairmont hotel.
It was a distinct pleasure of mine being invited by the CAA to conduct a one-on-one discussion with Whall and explore trends and disruptors that are affecting the electronic security industry. We began our conversation on the doorstep of today’s smart home where tech goliaths such as Amazon and Google, among a raft of startups, are forcing security dealers to adopt new business models that account for the evolving dynamics of connected technologies and related services.
These market-altering forces, for instance, have independent security dealers challenged by the prospect of adopting a DIY offering — or even a hybridized model — out of concern that competing DIY providers could cannibalize traditional buyers, Whall explained.
“The sales model has gone from an in-home tech to more over the phone and over the Internet, with a minority of it now coming from those in-home sales,” he said.
Pricing models are also beginning to be affected. Consider Amazon’s Ring Alarm, a DIY home security system that is marketed with professional monitoring and unlimited video storage for just $10 per month. Widespread adoption of a reduced pricing structure of this ilk is worrisome to some in the industry: Think company valuations.
“The valuations in our space have always done well because we have always done well on margins — 50, 60, 70% margins have been what sells these companies at high valuations over the years,” Whall said. “And I think that’s what the independents are thinking about; what do we do with our valuations going forward if monitoring is going to be $10? That is cutting into what we do.”
Emphasis on Pricing Transparency
The increase in lower cost pricing models from new entrants, including national marketers such as SimpliSafe, necessitates that security dealers be more transparent about their own pricing, Whall explained.
“Monitoring sounds like it’s monitoring, but it rarely is. If it was just straight burg and fire monitoring in the home I think all of us would have to be pretty close in the range of what we would be willing to charge for that,” he said. “And there would always be some price leaders that might want to compress that a little bit.”
Of course, security dealers, especially larger companies, have traditionally subsidized the upfront equipment costs to maximize the monitoring contract. For example, a traditional system could be $40-$70 per month, with the upfront investment financed into the contract. That sort of clouds the overall picture for the consumer, Whall said.
“As an industry we have got to use our websites, we have to use our advertising presence to bring those fees across the board,” he said. “‘Hey, customer, there’s an upfront fee and you can pay for it with cash. You can pay for it by financing it. You can pay for it by adding it into your monthly. There are standard fees to what we do. Do you want monitoring? Do you want the apps? Do you want the smart home technologies? Do you want warranties on that? Do you want cell towers?’
“Those are services. As an industry I don’t think we have done a great job explaining to the consumer how those services raise their rates up,” he continued. “I’ve been very critical about the websites at the companies I have been with over the years at just how bad they are and how difficult it is to find out anything.”
Whall emphasized it’s easy to explain the details of an offering when speaking directly to the consumer. But, remember, sales are increasingly being transacted online, especially among younger buyers and Millennials. Therefore the need to fine-tune your website to support an e-commerce platform.
“As an industry we have work to do to be very transparent about what our services are and what we are charging for, because nobody is really charging a better price than us,” Whall said. “Even at $10 per month for monitoring, if all you are getting is monitoring, most people in this room would probably say, ‘I can still probably do that deal. I can get close enough, and sell that we are better at it and we deserve $15 or $19.”
The reality is, he said, what you are putting into a deal priced between $10 and $40 is a lot of services as well financing the equipment. “I just think the transparency piece is what we have to work on as an industry to make it so the consumer can make an informed decision.”
Considering No-Term Contracts
On the topic of contracts, Whall suggested that independent dealers should be comfortable with the idea offering of a no-term contract. Note: no terms certainly does not mean no contract. You absolutely want to protect yourself with a signed contract that limits liability and expressly details what happens in the event of an issue.
“If I don’t have to finance the deal, having no terms I think we can all get right with that,” Whall said. “I can’t tell you how many deals I’ve shook hands on and said, ‘If you don’t like the service just call me and cancel. If we haven’t earned your business it’s OK to cancel.”
Historically in the alarm industry, Whall explained, the number of contractual months has always been about how banks could lend on that or dealers would leverage the contract to say they have guaranteed revenue coming in based on the length of the contracts.
“But remember the offset to that is you are going to charge them upfront. Your business is going to look a whole lot healthier,” Whall said. “You are going to get money at the point of sale that you typically haven’t got because you subsidized that install and put it into the monthly fee.”
Can a dealer lend as much against a no-term contract? Yes, Whall explained, because you would just be changing the dollars from recurring where all your margin comes from to taking money out at the time of transaction
“I don’t need you to guarantee me 60 months of this because I didn’t finance you buying this. So it’s not you paying me. I don’t think we need 3- or 5-year contracts in order to compete. I don’t think that is an issue for issue for us.”
‘Commercial feels a little safer right now’
Whall compared and contrasted current market conditions in general terms between the residential and commercial sectors. Whereas the resi space is being inundated with new entrants, big box retailers, telcos and the like, the commercial sector has proven more difficult to infiltrate.
“Commercial feels a little safer right now. The years of expertise, the requirements, the regulations to get into the space, there is a bit of a comfort in that,” Whall said. “I control my destiny and I’m not so worried about what the new entrants are going to do and is somebody going to come in here and try and buy market share at my expense.”
One of the most notable changes over the last five to 10 years in the commercial sector is the rise in the number of integrators selling recurring revenue. “For a long time integrators were like, “Look, I don’t talk to alarm guys. We do the big boy stuff over here. We are engineers. This is where the real stuff happens. You guys do cute stuff,’ Whall chuckled. “Now they are like, ‘that cute stuff pays high multiples. Maybe I can bring some of that over here.’”
Most of the recurring services in the integrated commercial space is centered around test and inspection, Whall said, but independent integrators are more and more understanding they can build that part of their portfolio as a means of increasing their valuation multiple.
“The other nice thing about the commercial space, I have for a long time compared it to the automobile industry,” he continued. “You have a commercial system, in five years you are going to need a new one. It’s going to need to be updated; you are going to need the new technology. The number of cameras; the use of those cameras. The access control. What you can actually sell.”
Can a small market integrator still compete in the commercial space today, in the face of so much consolidation by national providers?
“All day long, because there is still a fair amount of labor into the component. Those techs are gold. The price that someone is buying equipment at vs. what you are buying it,” Whall explained, “you might be in column 1 vs. column 5, yes that will get there at the end, but you also have a lot less overhead. You are not baking those in. I don’t see the actual buying of the widgets preventing me from competing against the big guy in the space.”
Playing the local card remains a strong play for integrators doing business in their own communities, Whall stressed. “I’m right here. I’m your neighbor. I’m in your community,” he said. “I’ve sold on both sides of this equation, but there is always room to be the independent guy.”
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