Security Analysts’ Take on Canon-Milestone Deal
Find out what top security industry observers Bill Bozeman, Jeff Kessler and others have to say about the big Milestone Systems/Canon deal.
The September issue of SSI features my exclusive interview with leaders from both Canon Europe and Milestone regarding the former’s recent acquisition of the latter that has shaken up the video surveillance industry. To get a balanced and insightful perspective, I also spoke to three of the security industry’s top analysts to get their assessment on what this marriage of legacy imaging giant and IP video innovator means for the surveillance landscape.
Following is what PSA Security Network President/CEO Bill Bozeman, Imperial Capital Managing Director Jeff Kessler and IHS Principal Video Surveillance Analyst Jon Cropley had to say about it.
Were you surprised when the announcement came down that Canon Europe had acquired Milestone? Why or why not?
Bill Bozeman: I was not surprised Milestone made a financial move; however, I anticipated a try at an IPO as discussed at ISC West. Milestone has been on a roll the past few years. They became a prime target for investment to take them to the next level. I was surprised it was Canon who did the deal as their video surveillance focus had been lukewarm up to this point.
Jon Cropley: There were indications that Canon had big plans in video surveillance before the acquisition. Back in August 2013 its CEO, Fujio Mitarai, spoke about security cameras becoming an “important pillar” for the company and the market having “limitless possibilities for growth.”
Jeff Kessler: Specifically, this transaction did surprise me. It surprised me only because it seemed to come out of nowhere. In hindsight, for Canon, it makes a lot of sense for Canon and its distributors and reps. For Milestone, it presents VMS pioneers who had worked incredibly hard but unsuccessfully so to get “Milestone Inside,” like Intel Inside when integrators and installers put in a system. However, it does provide liquidity to highly regarded entrepreneurs and operators â€• and perhaps above all, its Swiss investors â€• who began to realize the revenue limits that were facing VMS as part of the total security solutions package.
On a large scale, this type of transaction was bound to happen. We wrote a long piece on “The Coming Collapse in IP Video Horizontal Layers” in 2011, as it was becoming clear that VSaaS, video storage and analytics on the edge, video dashboards, “PSIM light,” and other video appliances and value-added products and services would eventually become part of a larger video solutions business, which in turn would be owned by larger security solutions companies. Some of the more aggressive companies around the world, looking to add to their core value proposition, ranging from Tyco to China Security & Surveillance to FLIR and now to Canon, are driving a broad case approach for integrated video solutions. As the horizontal layers collapse, so-called solution providers get to keep more of the profits they have, while seemingly making more profits to begin with than independent manufacturers. It is just that Canon, specifically, was a surprise because it was not a company we had thought was that interested in security.
What advantages or disadvantages does the new ownership arrangement offer both Canon and Milestone? Consider operations, innovation, technology, business and growth.
Cropley: When it comes to surveillance, before the acquisition, Canon only sold security cameras. The acquisition of Milestone allows it to offer customers a security solution combining cameras and either video management software or network video recorders. It also provides the company with access to Milestone’s large customer base, particularly in regions outside of Canon’s home market of Japan. This will better allow it to leverage its strong brand reputation from the consumer market in the video surveillance market. As for advantages to Milestone, the arrangement provides it with access to the resources of a much larger company. This could be useful for research and development efforts. However, it also potentially allows it to save money on marketing, purchasing and overheads. Furthermore, it should help Milestone expand its presence in Canon’s home market of Japan.
Kessler: As it turns out, Canon has long coveted an entrÃ©e into the IP security and surveillance market, but was not satisfied with the quality of a lot of the software and services candidates that were out there. They had to go with a name that could move a market, even if that carried the risk of channel conflict and loss of alliances. Canon has a very well respected name in quality IP cameras, but little experience with the security channel and the “security” way of doing business. In our opinion, Canon gets access to a high-quality company that will not besmirch the Canon brand, and it opens up a potentially huge market to them.
Bozeman: Growing any business requires capital. The better capitalized the more likely rapid growth can be attained. Canon can provide the financial support and also provide a huge worldwide operational network, so on paper it looks great. Milestone was a niche player in a fast growth space, they needed to do something to take it to the next level and the Canon deal certainly has the potential to do just this.
Do you see this deal having a material effect on Milestone’s open-platform approach? What about alienating any of its many eco-system technology partners?
Kessler: Ah, here is the rub. Milestone has made so many pronouncements about maintaining its “Chinese Wall” and its channel independence that it sometimes appears that this is their dominant ethos today. And why not? While Milestone is certainly highly respected by their technology and channel partners, they are caught in a bind. Milestone has pledged to remain an open and independent provider of VMS to the industry, with management staying put. In our view, that may work for the short term, but over the next few years we suspect Milestone’s total independence, its relations with its extremely broad base of customers â€• particularly Axis, its closest big client and leading IP camera company, but also more recently large clients like FLIR â€• and its intact management structure will be put to a severe test, which could potentially alter alliances in the industry.
Cropley: These are the big unanswered questions and only time will tell. Milestone remains publicly very committed to an open-platform approach. However, both Canon and Milestone will need to work hard to reassure eco-system partners. It will be important for them to develop a clear strategy in this regard.
Bozeman: Only the Canon executives know what their plans are regarding Milestone’s open platform. It seems logical they would stick with what made Milestone successful, but we all know this is not always the case. I do not see the existing channel being alienated as Canon has not really developed an identity in our space. Needless to say this will quickly change.
Looking ahead to a three-year timeframe, what are the best- and worst-case scenarios you envision as a consequence of this deal?
Bozeman: The best case is that Canon provides the financial resources and international infrastructure to allow Milestone to grow at an above-industry mean. The worst case is Canon tries to tell Milestone how to run their VMS business.
Cropley: It depends on whose perspective is considered. The Milestone-Canon deal could lead to greater innovation and lower prices. Alternatively, it could be the start of greater industry consolidation and less choice for end users.
Kessler: The best scenario is that Milestone has somehow convinced all of its ecosystem partners to stay with it, while Canon creates its own large, competitive IP video business by penetrating the channels that Milestone opens up for them. In tandem, the integration of a high-quality IP camera manufacturer and a high-quality VMS provider create superior middle and high-end solutions at highly competitive prices, while continuing to selectively penetrate the low end. The worst-case scenario is that Canon is left alone with a company that has lost all its large alliances in to both independent and already integrated providers of VMS. It could still be a win for Canon, but the IRR spreadsheet they would be looking at would be much less attractive.
Do you see similar transactions taking place in the industry within the next year or so, why or why not?
Kessler: I believe one needs a company that has successfully integrated corporate cultures, large worldwide operations, placed the right personnel in the right positions, and still kept legacy relationships, like Canon has to be successful here. Some of the following companies have successful experience in integrating acquisitions, but some have not. There will be pressure on Axis, Samsung, Sony, Panasonic, Mobotix, Vivotek, etc. to add VMS relationships. Hikvision and Dahua, I can’t comment on. However, the companies already making acquisitions or who are already providing a portion of the total pie, like Tyco, FLIR, Avigilon, DVTel, China Security & Surveillance, will probably not be under as much pressure to do something.
Cropley: Widespread consolidation of the video surveillance market is probably still some ways off. However, if aggressive price declines continue and margins are squeezed, the number of vendors offering video surveillance equipment is likely to be reduced either through acquisition or market withdrawal.
Bozeman: Many, many more, and why not? The money is available, our industry is growing, VMS is super-hot; the technology is becoming more ingrained in everyday life. What is really interesting is that we are still just getting out of the gate. VMS currently is and will continue to change the way we live.
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