CLSA Asia-Pacific Video Surveillance Outlook

Taiwanese security equipment makers will benefit from the popularity of video surveillance, enjoying multiyear growth as channels and system integrators rely more on Asian producers to provide the best cost and performance products, said Chao-Kang Cheng, Analyst at CLSA Taiwan. Promising areas include high-end analog cameras (speed dome and day-night cameras), digital video recorders (DVRs) and IP surveillance products.

Research and consulting firm Frost & Sullivan forecast the global video surveillance equipment market to grow from US$800 million in 2006 to $10 billion in 2008, said Chao-Kang Cheng, Analyst at CLSA Taiwan, to the American Chamber of Commerce Technology Committee in Taipei. Western and Japanese system integrators and electronic equipment vendors dominate the space.

These numbers, said Cheng, include only equipment revenue  cameras, video management software and DVRs. According to market research firm iSuppli, semiconductors associated with this segment, including digital signal processors (DSPs), interface logic, image sensors and memory, will account for about $2 billion in revenue by 2011.

Surveys by industry vendors suggest strong demand from the Middle East, Russia and especially China. ¨Chinaˇs Safe City Project,〃 said Cheng, ¨is a nationwide initiative to boost the general security level in around 660 cities; it includes deployment of new surveillance cameras in heavy-traffic areas.〃

Key players, said Cheng, can be categorized into the three following groups: solution providers like Honeywell Security, GE Security, Tyco Fire & Safety and Siemens Building Technologies; who are not just equipment vendors. They offer video surveillance, fire detection, access control and key management solutions. ¨Their brand value and intensive vertical market penetration stand as major advantages,〃 explained Cheng.

Second are equipment vendors (cameras and DVRs). Major vendors are Bosch Security Systems, Sony and Panasonic, which sell under their own brands. Finally, Verint Systems, Axis Communications, Nice Systems and Idis are leading surveillance pure plays. ¨A majority of their business,〃 said Cheng, ¨is video surveillance equipment (cameras and DVRs) or software (video management).〃

Taiwan's Role

Taiwanese surveillance equipment makers, said Cheng, achieved 27 percent annual revenue growth during the first half of 2007. Average earnings growth was 41 percent.

Favorable exchange rates, customization capabilities and better control of channels contributed to this stellar performance. The IT and networking industry is installing IP surveillance systems on production chains, and Taiwanese vendors are well-positioned to reap the benefits. Despite the industryˇs robust prospects, manufacturers have to overcome certain hurdles, including limited differentiation among low-end products due to advanced chip solutions and fierce competition from networking giants and Chinese newcomers.

Although Taiwan will continue to enjoy healthy volume growth in coming years, low-end cameras face fierce price competition from Chinese vendors. ¨Taiwanese and Korean makers,〃 Cheng said, ¨are trying to focus on higher-margin products, such as speed dome, pan-tilt-zoom (PTZ) and day-night cameras.〃

Given that Korean vendors are Taiwanese surveillance makersˇ main competitor, exchange rates affect competitiveness. ¨The Taiwanese dollar has depreciated against the Korea won by 29 percent since 2001, making Korean equipment more expensive,〃 Cheng said. ¨This partly explains why some independent Korean vendors  Hitron and Idis  have steadily retreated from their leading positions; LG and Samsung, however, are expected to become more visible.〃

As the surveillance market is fragmented, Cheng said, ¨most participants specialize only in certain verticals or regions. This allows vertical market penetration and customization.〃 Consequently, level of customization often determines vendor competitiveness.

IP Surveillance's Slow Takeoff

IP cameras have been on the market for more than 10 years, but they account for only 10 percent of total camera shipments in the U.S. and Europe. Why has it taken such a long time for IP-surveillance systems to replace traditional CCTVs? Two main reasons, said Cheng, have contributed to the slow takeoff: lack of standards and prohibitive pricing.

Surveillance systems follow TV standards, with no compatibility issues between one vendorˇs analog cameras and another ˇs DVRs. One vendorˇs video management software, however, may support only certain IP cameras, said Cheng. ¨End users have been put off by lack of choice and, thus, delayed adoption of IP surveillance.〃 Today, there are clear leaders in the sector  Axis for IP cameras and Milestone for NVRs. New players will need to support leading brands, thus mitigating compatibility issues.

Well-established production has made analog cameras very cost-competitive. ¨For the same image quality, an IP camera costs three to five times more,〃 Cheng said. Resistance from channel players is also a problem. ¨CCTV system channels,〃 said Cheng, ¨are very close and conservative. Traditional channel players are not familiar with information technology and, therefore, cannot support end customers in deployment of IP surveillance systems.〃

According to video manufacturers polled by JP Freeman, said Cheng, 10 percent of video systems sold in 2006 comprised of entirely IP equipment (IP camera + NVR), 7 percent hybrid and 83 percent analog. The consulting firm forecast pure-IP surveillance tools to account for only 36 percent of all video sales by 2011. ¨It suggests that manufacturers seemed to feel that it could take until 2020 or so for all analog video equipment to disappear in favor of IP systems,〃 said Cheng.

The signs are not all cloudy. ¨The IP-surveillance era has just started, with only a single-digit percentage point penetration,〃 said Cheng. ¨The unstoppable evolution of technology and obvious appeal of IP, however, mean that rate of adoption is rapidly accelerating.〃 Frost & Sullivan estimated the IP surveillance market at $1.4 billion in 2008 and $6.5 billion in 2012 with a compound annual growth rate of 47 percent for 2005-12. The segment includes IP-based cameras, NVRs and IP-surveillance software.

Frost & Sullivan also forecast the global market for IP cameras to grow at a compound annual growth rate of 36 percent from $312 million in 2006 to $2 billion in 2012. ¨The general consensus,〃 Cheng said, ¨is that IP camera shipments will outnumber those of analog cameras in 2011-12.〃 The top three players of IP cameras in 2005 were Axis, Sony and Bosch.

Cheng sees the following trends as having a big impact on IP surveillance in coming years: more powerful and intelligent IP cameras. ¨Megapixel IP cameras have become a must; they offer superior image quality and cover larger areas.〃

Cameras have become smarter than simple motion detection with video analytic technology, which identifies and tracks objects. More intelligence at the edge (versus core devices, such as the DVRs in CCTV systems) also means greater scalability. ¨End users can actually save money by installing intelligent cameras because they can hire fewer security guards,〃 said Cheng.

Another big advantage of IP surveillance systems is that it is all network-connected, said Cheng. ¨An alarm or sensor can trigger cameras to start recording and sending video signals to a specific destination. Integration with point-of-sales (PoS) devices could also pinpoint an action, such as swiping of a credit card or cancellation of a transaction.〃

CCTV Systems Experience Healthy Growth

Japan dominates the high-end analog camera market, with Sony's charge-coupled devices (CCD) making up roughly 70 percent of the worldˇs professional-grade surveillance camera sensors. ¨Taiwan, however,〃 said Cheng, ¨leads production, shipping 9.9 million surveillance cameras in 2006.〃 Japan continues to dominate in terms of revenue.

DVR Market to Hit $1.5 Billion in 2008

Korea was arguably the first country to ship DVR products in 1999, and Idis is a leading DVR maker with $75 million in revenue in 2006, of which 30 percent was derived from PC-based and 70 percent from stand-alone DVRs.

Taiwan, however, shipped more DVR units than Korea for the first time in 2005. ¨It should lead the sector by revenue in 2007 and outgrow the industry average in the next two years,〃 said Cheng. As DVRs replace VCRs as a main storage device for CCTV systems, the DVR market is set to grow to $1.5 billion in 2008 from $896 million in 2005. More video analysis software is being built into DVRs, which are equipped with networking functions.

Although the DVR market will reach the saturation point in 2008, and be steadily overtaken by IP surveillance NVRs, it will remain the key growth driver of Taiwanese surveillance equipment makers over the next two years. ¨Except for Geovision, which has been a dedicated PC-based DVR vendor since its incorporation,〃 said Cheng, ¨all major Taiwanese manufacturers produce analog cameras and stand-alone DVRs.〃 AV Tech and EverFocus  two leading Taiwanese stand-alone DVR makers, grew by more than 45 percent for revenue during the first half of 2007.

NVRs and IP Surveillance Software

The global NVR and IP-software market will also see strong annual growth of 45 percent for the next five years. It should reach $800 million in 2012. IP surveillance software is non-proprietary in nature and offers extensive scope for customization. The top three players are Milestone Systems, Nice Systems and March Networks.

NVRs store digital video and can be located and distributed anywhere within an IP network. The market includes hardware, software and PC servers, but excludes network DVRs. The top three players are Bosch Security Systems, Verint Systems and Pelco.

Although there are no reliable market figures showing market size of different applications or IP-surveillance vertical markets, anecdotal evidence points to increasing demand in education, government (transport and civil surveillance), banking, industrial and retail segments.