Entrepreneurship in the IP Video Industry

Entrepreneurship in the IP Video Industry

Allan McHale, Director of Memoori, describes what makes top innovators for IP video distinctive.

The epicenter of physical security entrepreneurship is the IP video business. Memoori's database of 143 worldwide manufacturers of intelligent analytical software, digital cameras, encoders and digital storage are significant manufacturer suppliers. We identified another 20 companies, yet to be verified, with annual sales of less than US$1 million. This is unlikely to be the full complement of players to the IP video market. However, it is a substantial sample of the major players in the world market.

The United States is home to 45 percent of these companies. Figure 1 shows the company distribution by country in major developed markets.

Figure 2 shows by country how many countries have companies with annual sales of less than $100 million. In the United States, they account for 47 percent of the companies manufacturing digital video products. Of these companies, 36 (73 percent) had sales between $1 and $10 million in 2007. Nearly half or 43 percent of these companies were founded since 2000. This is high percentage of startups, unseen in any other country.

As Figure 3 illustrates, America has not just spawned more companies, but they are much younger. Some 12 percent were founded since 2005,
48 percent since 2000 while 40 percent are older than 9 years.

No other country established startups younger than three years old. Only Israel, Taiwan, Germany and the United Kingdom had companies who were less than nine years old, forming about 12 percent of startups. Why should America be so active in setting up new companies in this area?

Has U.S. business seen something that the rest of the world has not? Or
are they getting in late? If neither of these assumptions are correct, is it that other countries have fewer entrepreneurs and the application of digital technologies must come from established businesses?

American Startups
The United States leads in entrepreneurship because the technology to produce digital video solutions comes from electronics and IT, which it leads in. The second factor is the support needed for setting up new ventures is established for financial investment and management skills. Both are practiced and encouraged in America, particularly in Silicon Valley and the Boston area. We estimate that more than 50 percent of U.S. startups in IP video are clustered in these two regions. American culture encourages risk taking and failure does not necessarily have stigma attached to it.

The availability of skills and capital investment allows startups to flourish, but it still requires entrepreneurs to turn the opportunity into a profitable business. A quick check on these startups show they are managed by professional teams with success in developing and operating companies in security. In some cases, the owner managers are serial entrepreneurs, so they are taken seriously by their larger and older peers.

The solutions need to open up new markets, not just existing ones, for startups to grow into the top tier of profitable businesses. This is happening for some of the newly established suppliers, who have recently recorded annual growth of 30 to 40 percent in IP video and established their businesses worldwide. However, our discussions with specialist startups and older established companies suggest annual growth of no more than 10 percent over the next two years. Most claim that their customers are delaying rather than canceling projects, as the security market has tended to do well during other economic downturns. However, experts say this recession will be worse than others and that the major players will see more acquisition opportunities, as smaller companies struggle to get access to investment.

Success Stories
IndigoVision is an example of how a young, dynamic and well-managed
company can take on the world's major suppliers and deliver complete end-to-end IP video solutions. “We are continuing to expand the business by extending our offering to become a complete security solution provider by encompassing alarm management and access control as well as video,” said Oliver Vellacott, IndigoVision CEO. “We already integrate with 17 third-party systems, which gives us integration with the majority of the market and have a global presence with people in 18 countries.”

The IP video market has been dominated by specialist suppliers such as Axis Communications, Milestone Systems and IndigoVision, but they will be taking on much more serious competition in the future. Traditional
video surveillance suppliers that arrived late for the party, such as Pelco, will increase their share of the IP video market as they implement new strategies.

Jean-Marc Zola, VP Fire and Security Strategy, Schneider Electric TAC discussed Pelco's plans for the IP video market. They launched their program in 2006, hiring a dedicated team to develop a full IP video offering. The products developed by this team are already sold on the market, as Pelco currently commercializes an IP video line, including cameras/domes to video management systems. Pelco is focused on complementing the IP offering with in-house image processing technology, introducing a new industry standard in image quality, scheduled for release March 2009.

Pelco is educating the end user market about the benefits of IP video in different applications and developing the right channel to market for those products, Zola said. The majority of Pelco customers have invested in the IP segment, and Pelco is committed to serve them with IP video products at the same level of quality. But newcomers like IT distributors represent an opportunity for incremental sales. A strong heritage market will be an immense benefit to Pelco and the like during the recession.

Scandinavia has spawned two successful leaders in this business: Axis and Milestone. Henrik Friborg Jacobsen, VP Strategic Alliances and co-founder of Milestone, believed this was partly because Scandinavia has a high level of IP adoption and is open to new technologies. The IT industry is strong in Scandinavia, and this IP friendly climate has meant good growth conditions for the successful market leadership from Axis and Milestone Systems, who are long-time alliance partners.

Milestone will push for an open platform, allowing easy integration with best-of-breed solutions. An open platform will give customers more flexibility and a better return on investment, Jacobsen said. With
external investment by Index Ventures, a strong financial foundation has been bolstered for future growth and development of solutions in open platform IP video surveillance.

"The combination of our solid market position, a profitable business and solid financial foundation gives us strong confidence in our future potential despite a world recession,” Jacobsen said. “Historically we have
seen that the security industry is much less exposed to macroeconomic conditions than others, and we believe the IP video industry will continue its expansion at somewhat reduced, but healthy growth rates in the range of 20 to 25 percent annual growth during the next one or two years.”

"The credit crunch is impacting the IP video market in many different ways,” Jacobsen said. “Structural changes in global investment portfolios have driven a rise in the Japanese yen, which makes Japanese IP video vendors less competitive in the international markets. On the other hand, many Japanese companies are cash rich and better positioned for mergers and acquisitions than their European and American peers.”

While life for the startups in this industry will become more difficult with the economic recession, there is no reason to assume that they will be disadvantaged because of their youth, provided investors don't get impatient and exit early. The impact will depend on the sub-segment. For instance, video analytics could be impacted, as the number of startups
multiplied in the last few years. At the same time, the major companies
have invested in in-house technology in parallel. The ramp-up of this sub-market has not matched the optimistic forecasts made by market
research companies.

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