Bright Spots In Stormy Weather
- By Steven Titch
- Apr 01, 2009
The security industry stands to be hit by the economic downturn, although certain factors specific to the security and surveillance market may offset the degree of severity, analysts told a recent conference of security system integrators.
Security projects, in general, will decline due to tighter budgets, especially through the first half of 2009. While the effect of the recession may linger in some vertical sectors for the next 12 to 18 months, others, including education, government and transportation, may start to see an uptick as early as mid-year.
Speaking at the 2009 Milestone Systems Integration Platform Symposium in Las Vegas in February, Stan Schatt, vice president and practice director for ABI Research; Simon Harris, senior research director for IMS Research; and John Honovich, an industry consultant and founder of IPvideomarket.info, did not sugarcoat the impact of the recession.
Harris reviewed some of the grim news from the fourth quarter of 2008 -- March Networks cut 7 percent of its workforce; Pelco laid off 19 employees and froze salaries for 2009; Niscayah cut 600 jobs; and Steelbox and NetVersant folded. Market leaders, such as IP camera manufacturer Axis Communications, are seeing slower growth and reduced profits due to deferred projects and competition from lower-end manufacturers, such as ACTi, a Taiwanese maker of IP cameras.
'Projects On Hold'
“Projects are on hold,” Harris said. “Systems are getting smaller. Some customers are turning to low-priced brands, which are seeing some growth at the expense of companies with bigger market shares.” There also is an increased interest in hybrid solutions as users attempt to extend the life of analog equipment.
The analytics market, Harris and others agreed, is being hit hardest because of earlier vendor overpromises.
Honovich maintained that the full effects of the massive cutback in consumer spending have yet to be truly appreciated. Consumer spending, which grew to $10 trillion last year, will shrink drastically and not recover for many years, he said.
For many businesses, this will mean a decrease in their tolerance of risk—larger, more aggressive projects will give way to smaller, incremental ones. High debt, combined with slower cash flow, will restrict future spending in either case.
With headcount under pressure, projects that involve less labor will be more attractive. “Even in IT, people are wearing multiple hats and doing more with less,” Honovich said. “The question of protecting the company has become, ‘Will there be a company to protect?’”
Is The Glass Half-Full?
Still, there’s opportunity to view the glass as half-full, Schatt said. While acknowledging the recession, Schatt said some of the verticals in the security surveillance industry should recover more quickly (see table).
There is no question that spending at large enterprises is down, Schatt said, and that small and medium-sized businesses have been hit hard. “There’s been a real pullback because small and medium- sized businesses are so cash-flow intensive,” he said.
Yet Schatt cited data from the Institute for Supply Management’s Purchasing Managers Index that charts the recessionary path and applies models from the 1974 recession, which ISM says the current downturn closely follows. ISM found that declines began in July 2008. The recession, it forecasts, should see its nadir in May 2009, followed by an uptick in the third and fourth quarter. By March 2010, the economy should recover.
The video surveillance market is in much better condition, Schatt said. An increase in government projects, driven by the stimulus, will have an impact by the second half of this year.
The stimulus provides $3 billion each to airports and mass transit for infrastructure improvements, a portion of which will include security, Schatt said, who reminded his audience that President Barack Obama, in his Jan. 26 radio address, said security improvement in 90 U.S. ports would be a priority in the infrastructure spending.
In addition, Schatt pointed to the Department of Homeland Security’s $237 million budget for video surveillance and the $35 million Chicago is spending on security upgrades as part of its Urban Area Security Initiative.
IMS’s Harris generally agrees. Despite current difficulties, “the industry is holding up well,” he said. “Long-term prospects are healthy.”
He noted that for the surveillance market, 2007 was an exceptionally strong year, with growth of 45 percent. Growth remained strong for the first three quarters of 2008. The fourth quarter was well below average but still ahead of fourth quarter 2007. The first half of 2009 will be weak, he predicted, but stronger than fourth quarter 2008. The stimulus will boost the second half of 2009, although he expects the industry’s 35 percent growth in 2008 will drop to 25 percent in 2009.
“There will be signs of recovery in commercial markets by the fourth quarter 2009,” he said.
Venture Capital Injections
Venture capital remains another bright spot. Despite the liquidity crisis, a number of manufacturers in diverse segments had no trouble attracting investment in the second half of 2008. Milestone received $27 million; Pivot3, $24 million; and Stretch Inc., $15 million. Even analytics companies VideoIQ and AgentVi got injections of $10 million and $8 million, respectively, although Honovich countered that burn rates among analytics developers tend to be high.
Banking and retail sectors will be the slowest to recover. Even so, users here cannot put off security upgrades indefinitely.
The financial sector has a large installed base of analog equipment that is aging. Ultimately, this pent-up demand will have to be met. “Time is on the side of video surveillance,” Schatt said.
In retailing, financial officers will have to balance the need to cut operating costs with anticipated losses from shoplifting and employee theft. “When the economy goes down, crime goes up,” Schatt said, pointing out that retailers lost $13 billion to shoplifting in 2008.
The brewing IP camera standards battle between the Open Network Video Interface Forum and the Physical Security Interface Alliance also could slow recovery.
“It always takes longer than vendors think to get standards approved,” Schatt said. The worse-case scenario would be if both groups harden their positions, leaving two standards in the market. The HD-DVD and Blu-ray battle froze sales for high-definition DVD players for a year, Schatt said, and IT buyers are standards- oriented. An extended standards battle will induce “analysis paralysis” in the market.
Analytics On The Edge
Analytics might be the most curious segment right now, all three analysts agreed. Users have been stung by poor functionality in areas of facial recognition, aggressive behavior detection and left baggage.
However, analytics is proving successful in applications such as perimeter protection, license plate recognition, people counting and camera tampering. But these applications are low-end and generic enough to be packaged with cameras, a trend that is likely to increase.
Finally, open system architectures, by giving users the freedom to mix and match, even if it’s among economical components, also might be a factor in a faster recovery. Honovich, while more cautiously optimistic than his peers in terms of recovery prediction, sees open systems driving future sales.
This article originally appeared in the April 2009 issue of Network-Centric Security.