Commoditization and technology: Convergence drive the industry shuffling

Several trends are evident in the industry’s development over the past few years. The main ones are the rise of Asian manufacturers, a focus shift from providing products to providing solutions, and the recent wave of industry consolidation in the form of several M&A deals.

One of the outcomes of the global financial crisis of 2008 to 2009 was pushing buyers into looking for cheaper options for their security needs. This growing price sensitivity cleared the stage for Asian manufacturers, especially from China, to take lead in the global market. “I think to some degree it helped accelerate the success of the Asian manufacturers since customers became more price sensitive due to reduced security budgets which forced them to look ‘out of the box’ at Asian manufacturers,” mentioned Justin Schorn, VP of Product Management, Aimetis.

Out of the Asian manufacturers, Dahua Technology and Hikvision Digital Technology are the two companies that have taken center stage in terms of market share. According to IHS, these two companies have the largest market share in a highly fragmented industry. Hikvision has a market share of close to 16.5 percent as of this year and Dahua 5.6 percent as of 2014. At the same time, the price of new technologies such as IP cameras was dropping, creating a commoditization wave in cameras and surveillance equipment. This influenced more sophisticated sensors (e.g., thermal cameras) which were previously too costly for most installations. “Significant cost reduction and technological improvement allowed thermal cameras to produce excellent images 24 hours/day without getting washed out during the daytime, have made thermal cameras with video analytics a commonsense choice for protecting commercial sites,” said John Romanowich, President & CEO of SightLogix.

The commoditization of equipment and the growing computing power were also influential in peripheral equipment. “For example storage prices have dramatically come down, thus enabling longer video retention times while simultaneously leveraging higher image quality,” added Aimetis’ Schorn.

Solution Oriented Approach
The commoditization and dropping prices of security equipment mean that manufacturers can no longer differentiate themselves based solely on price or technical features and specifications. In the meantime, the advent of IP cameras and the ability to integrate them with other systems opened up the possibility to “tailor” specific solutions for different verticals. Small-to-medium-sized companies are striving to differentiate themselves through specialization in specific niches and market verticals.

More companies are now offering an end-to-end video surveillance solution offering both software and hardware. Surveillance companies are also branching out into other product sectors, offering both video surveillance and access control. VMS companies such as Genetec and Milestone Systems and manufacturers like Axis offer both video and access control solutions; other video surveillance companies acquire access control companies.

Industry Consolidation
With all these changes in the industry, it seems natural that video surveillance companies need to look for more resources in order to grow. Therefore, the industry consolidates with more M&A activities.

These new M&As also bring uncertainty to the industry. In some cases former suppliers have become competitors, in other cases, an open platform is now owned by a manufacturer. The existing ecosystem of partner alliances is no doubt going to change as the newly merged companies start rolling out their new offerings.

Our interviewees pointed to several possible outcomes of these M&As:

“I believe that a lot of companies that have consolidated will demonstrate traditional proprietary behavior and try to lock up their customers in their proprietary solutions while still claiming they are open. We may see that you have to buy a full solution from one vendor in order to get the maximum benefit of their solution, such as optimized recording servers. I strongly believe that there is a need for end users to have a market that drives towards fully open standards to deliver solutions that are state-of-the art and give the end user freedom of choice to select what elements of a solution they need,” said Eric Fullerton, CEO and President of Vicon Industries.

David Ly, chairman and CEO of Iveda, sees another possible result of the consolidation. “Future of consolidation may mean standardization of technology on a global scale. All will want the same, such as what happened with the smartphone. With that standard, delivery will come from those who have that market reach that can serve mass markets,” he said.

According to Bob Banerjee, Senior Director of Global Training and Knowledge at NICE Security, M&As are not necessarily the best path for businesses to pursue, especially in a commoditized industry. Banerjee places an emphasis on vertical-specific cooperation. “I have seen technical alliances to solve vertical-specific challenges and this creates a micro-ecosystem where the manufacturers, integrators and consultants thrive. I think careful, deep alliances have a greater chance to impact our industry than acquisitions,” he said.

Some commentators view these acquisitions as a response to growing competition with Chinese manufacturers. The growing competition from Chinese manufacturers forces hardware-only manufacturers to look for new offerings that can compete in a highly commoditized product market. This could be one of the motivations for the M&As mentioned earlier, allowing manufacturers to broaden their offering by pooling together hardware and software.