ExclusivesAnnual Industry Forecast

2013 Industry Forecast: Controlling the Game

Strategic play can help security companies get better results in 2013.

By Laura Stepanek, Contributing writer

The security channel predicted 2012 revenue would be flat, and they were right. At $43.6 billion, total revenue from the sale, lease, installation, service and monitoring of security systems fell 0.7 percent in 2012. However, dealers and integrators who participated in SDM's Industry Forecast Study showed that they expect revenue in 2013 to begin inching up, perhaps by as much as 1.4 percent higher. *methodology change between 2007 and 2008.

Dealers and integrators think Video Surveillance will be the most rewarding segment when it comes to producing sales in 2013. When asked to rate the potential for sales among various technology segments, they gave it an average ranking of 3.29 out of 5. The Monitoring segment - where many changes are underway in technology usage - closely follows, with an average of 2.97 out of 5. *percentage of dealers and integrators rating each technology segment from Poor (1) to Excellent (5)

A variety of competition makes for a healthy industry, but for the first time in decades, traditional security companies are also now facing competition from telecommunications and cable providers such as Comcast, Verizon and Cox Communications - noted by 11 percent of respondents as being viewed as their greatest competition. *percentage of dealers and integrators indicating each choice; total exceeds 100% due to multiple choices allowed

More than three-fourths of dealers and integrators expect "economic conditions"Â to be one of the top three factors significantly affecting sales in 2013 — More than three-fourths of dealers and integrators expect "economic conditions" to be one of the top three factors significantly affecting sales in 2013, and nearly half think it will be the single greatest factor. But this number has dropped from last year, when 90 percent indicated it was among their top three. Total exceeds 100% due to multiple responses; survey respondents were asked to select their top three. *percentage of dealers and integrators indicating each factor; factors that received less than 5 percent response are not shown.

Average sales in 2012 were 3 percent below 2011 levels, according to dealers and integrators who participated in SDM's Forecast Study. This table shows the percentage of respondents with sales in each of 10 dollar-amount ranges for both 2011 and 2012. Average sales in 2011 were $2,853,537, and in 2012 they were $2,769,346. *percentage of dealers and integrators

The largest category of revenue from services in 2012, as in prior years, in the installation channel is revenue from non-residential sales/installation, followed by residential sales/installation. For the second consecutive year, the Industry Forecast Study measured revenue from "hosted services, managed services and cloud-based services," which came in at 5 percent of the total. In the "other services" category, respondents named things such as consulting, design and estimating, IT repairs, other business solutions, and even "everything else." *year in which revenue was counted +Â average percentage of revenue per service category among all dealers and integrators participating in the survey

SDM's Industry Forecast Survey, which has been tracking how dealers' and integrators' total revenue is distributed among types of products for decades, shows that burglar alarm systems and video surveillance systems are the top two product segments by revenue in the installation channel. This is based on 2012 revenue. *year in which revenue was counted +average percentage of revenue per product category among all dealers and integrators participating in the survey

Although total revenue and average sales were flat in 2012, dealers were successful at growing their recurring monthly revenue (RMR). Compared with 2011, 69 percent of dealers experienced an increase in RMR by an average amount of 34 percent. The average increase was $186,266. *percentage of dealers and integrators

The integrator channel expects its top three most fruitful segments in 2013 to be commercial office space, retail and education. Reaction to reduced spending in government sectors showed significantly in the Industry Forecast Study, with 0 percent of respondents, down significantly from 9 percent, selecting it as a primary source of revenue growth. *percentage of dealers and integrators indicating each market; markets that received less than 5 percent response in 2012 are not shown, with the exception of Government Facilities

*percentage of dealers and integrators indicating each choice There was a slight uptick in the percentage of companies that decreased employees in 2012, going from 14 percent to 17 percent of respondents to the Industry Forecast Study.

*percentage of dealers and integrators indicating each market Security installation companies that serve the residential market are learning to rely on existing middle-market homes for both new and add-on sales. Spurring new sales is dynamic development of home automation products, interactive security control, residential video, and the need to upgrade cellular communication devices to 4G technology.

Total exceeds 100% due to multiple responses; survey respondents were asked to select their top three. *percentage of dealers and integrators indicating each factor; factors that received less than 5 percent response are not shown. For the second consecutive year, the Industry Forecast Study asked respondents to indicate to what degree they are involved in offering their customers remote services, including cloud-based services. This will help the industry watch the trend toward security as a service. Two of these services inched up slightly among respondents in 2012: cloud-based video and SaaS video management.

Industry Forecast Study — Total exceeds 100% due to multiple responses; survey respondents were asked to select their top three. *percentage of dealers and integrators indicating each factor; factors that received less than 5 percent response are not shown.

Winning a security project today is a bit like playing a game of chess. With every potential job, you face a wide variety of opponents (competitors) who have an even wider variety of moves (security offerings/competitive advantages), all aimed at putting your king into checkmate; in effect, freezing you out of the job.

You’re all playing on the same chess board — the security market did not expand in 2012 — so it matters now more than ever that you use every advantage available to you for controlling the game. Are your pawns, rooks, knights and bishops (employees) properly trained and credentialed to compete for the business? Have you fully explored every possible move in terms of the services you should be offering to your market? Do you know your competitors and the plays they are likely to make?

Strategic play is key to winning. Expanding the playing area is not possible, just as expanding the security market outside the confines of the economy was not possible in 2012. SDM’s 2013 Industry Forecast, a study conducted annually among security dealers and integrators, showed that total annual revenue from the sale, lease, installation, service and monitoring of security systems fell a slight 0.7 percent in 2012 to an estimated $43.6 billion. Respondents for the third successive year named the top three, interrelated factors they expect to affect 2013 sales most significantly as: economic conditions (77 percent of respondents), capital spending by businesses (46 percent), and crime (40 percent).

“I think there are entirely too many ‘ifs’ going into 2013,” says Bill Price, president/CEO, Sonitrol Secu-rity Services Inc., Charlotte, N.C. “Some can’t be answered on December 5, but a number of them will be on January 1, 2013. The first (economic conditions) will affect the second (capital spending), but most likely won’t affect the third (crime), unless we go into another deep recession…”

Price says his company’s revenue year-to-date is up around 7.5 percent. “Business has been steady with an increasing activity level nearly every month. Overall, we’re thinking revenue will be up again if we don’t go over the financial abyss, and we don’t go back into a recession, and if Congress gets their act in gear before year-end, and if banks continue to lend money to business and if, and if, and if.”

However, while Price and other security executives experienced healthy year-over-year revenue growth, the game had different outcomes for different security businesses, ranging from flat to dismal in 2012.

“While 2011 was our very best year, [2012] has been substantially slower in our unique geographic region for new construction. In fact, in one of the largest counties in our state, during one month recently there were only 12 building permits issued,” describes Marc Forman, SET, owner of Alarm Electronics & Communications, Prescott, Ariz.

“Unfortunately, we are down almost 20 percent compared with 2011’s revenue. While last year was nothing short of stellar for a new business, 2012 has let us down on all fronts. I’m not nearly as optimistic for 2013 as I was the same time last year for 2012,” describes John Hoyt, CEO, Homeland Secure IT, Greenville, S.C.

Average sales in the industry in 2012 were 3 percent below 2011 levels, according to results of the Industry Forecast Study.

“We suffered a much more severe loss in sales than many. This is partially because we sold into our current client base to the point of saturation. We need either new clients or new products that existing clients need,” Hoyt describes.

Sales at Amherst Alarm, Amherst, N.Y., are “kind of flat,” describes CEO Tim Creenan. “Even though we’re flat, our net profit is up just because we’ve made some changes in anticipation of lack of growth in sales dollars,” Creenan states.

Although total revenue and average sales were flat to lower in 2012, dealers were successful at growing their recurring monthly revenue (RMR). Compared with 2011, 69 percent of dealers experienced an increase in RMR by an average amount of 34 percent. The average increase was $186,266.

For many security companies, such as Amherst Alarm and Denver-based Integrated Systems, selling more interactive services, which command a higher monthly fee, and upgrading alarm communication technology contributed to the boost in RMR rate. “We have an offering for those that no longer use home phone lines, by installing AES radio and using cellular communicators,” says Tim Howell, CEO at Integrated Systems and Rocky Mountain Security Services Inc. “These options helped increase the monthly RMR per account. There was also an increase in the video monitoring market in our area, which helped increase our RMR,” Howell notes.

The Industry Forecast Study asked respondents to rate how their level of spending on equipment will change in 2013, compared with 2012. The results show that the two categories with the most potential for growth are video surveillance and monitoring.

“With the changes in the way security panels function and the interactive apps that are integrated with the panels this is a segment that if you are not into you have the potential to be left behind. With video analytics and software that allow central stations to determine an actual event this has opened up a new avenue for companies that adopt the procedures to increase the RMR and provide a service that new customers perceive as the new norm for security. These two revenue sources are the future of security and will only increase in 2013; there is great opportunity in both,” Howell summarizes.

Dealers mostly agree that demand is strong, but there is still much uncertainty in the market. But at the same time, there are several positive indicators such as jobs and new construction. The SDM Industry Forecast Study, found that more than half of survey respondents (55 percent) expect their 2013 revenue to increase compared with 2012, while 38 percent expect no change and only 7 percent expect it to decrease. 2013 industry revenue is forecast to inch up by at least 1 percent this year, to $44.2 billion.

Click here to view the chart "Purchase Forecast: How Spending on Equipment Will Change in 2013"

Editor's Note: Using SDM’s Forecast Study data for 2013 business planning? This online version of the 2013 Forecast includes additional tables and graphs that did not appear in the print issue. How do your company’s results compare with those of the integrators interviewed for this article? Take SDM’s online poll at www.SDMmag.com.

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Laura Stepanek is a SDM contributing writer. Laura was the Editor of SDM from 2001-2020 and first joined the publication in 1984. She holds a bachelor’s degree in English from Barat College of DePaul University.