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In our annual report “The Physical Security Business 2017 to 2022” we have analysed the 3 main businesses that make up the physical security market; sized and compared their structures and given an overview of the competitive landscape. Built on this we have identified and analysed the 5 most important factors that will determine future strategies.
1) The gap between the major suppliers and the many hundreds of smaller suppliers gets wider every year and this is rapidly increasing the minimum economic size to operate profitably in this industry. We have now reached the stage where the business requires a strategy that either focuses on volume through the SMB market or brand through the enterprise business. We believe that no more than 5 companies by 2022 will thrive by operating in both at the same time.
This already applies to the video surveillance business and within the next 3 years in access control and later on in intruder alarms. In the video surveillance business 2 Chinese manufacturers have built up volume based on a protected home market. The gap between them today and the next tier of western companies is so wide that it looks highly improbable that it can be reversed and certainly not by western companies competing solely on price. Effective branding plus embracing Artificial Intelligence (AI) technology and quality service is the only solution.
Chinese companies have adopted the strategy of disrupting the industry by undercutting the profit margin of incumbents, whilst at the same time expanding markets and rapidly growing market share. This is by no means a practice restricted to Chinese companies. Amazon has applied this strategy very successfully and has never been highly profitable but they have grown rapidly every year and their share price keeps on going up.
This strategy has worked in the physical security industry not just because of the Chinese manufactures’ significant home market advantage but also because the industry is now entering a time when volume is becoming a critical factor as commoditization of video cameras takes hold.
Merger and acquisition between the leading western manufacturers is seen as a possible solution to match their size, but at best we believe it could only slow down further widening of the gap. Strong Brands with end-to-end solutions possibly focused on a number of vertical markets and having strong alliances with companies in other Building Automation services is the only other option for hardware suppliers to ensure a profitable future.
2) The region that has the highest growth and the largest share of the physical security market is China and Asia. This region has the lowest penetration of physical security equipment when measured by sales/capita and yet takes over 30% of the world’s market today but more like 40% of the video surveillance business. Therefore it should provide the best opportunity for future growth for western manufacturers. These facts show that to be in the top 20 suppliers of the world in 2022 you will need to have a significant share of this market.
3) It is ironic that Physical Security protection, which provides for the safety and security of people and assets in buildings and public places is perceived as having the highest level of risk of cyber attack. This must be the biggest single threat to our industry particularly video surveillance, which is the weakest link. Those suppliers that can prove a high level of security against cyber attack meet the most important buying criteria today in the enterprise business. Those that are selling vulnerable products will at best find their market share decline and probably face heavy financial damages that could ruin their business. Physical security will therefore be one of the big spenders on installing cyber security systems particularly in Smart Buildings.
4) Software services in all its guises has achieved the highest rate of growth of all components in the physical security business achieving a growth of double that of hardware sales for the last 5 years, but it still accounts for no more than 10% of the business. It will rapidly increase its share and continue to benefit from higher rates of growth for many years.
Much of this will come from processing the vast quantities of information that will be generated from the Internet of Things (IoT) connected devices including physical security sensors of which video cameras are the largest in number and by far the most important given that they hold the most critical data. A number of security manufacturers and software specialist companies are now investing in AI Video Analytics and Big Data programs.
The retail and transport sectors looks to be the most interesting application with video surveillance providing the raw and semi processed data but access control and intruder are other key areas. We believe that in the very near future it will become the most important factor in delivering product differentiation and compensating for the price erosion of hardware.
Major advances in AI chip technology are at last enabling intelligent video analytics that has the capability to vastly improve the performance of video surveillance systems across the whole spectrum of vertical markets both new projects and retrofitting existing installations. What an opportunity!
5) Integration and IT Convergence has for almost 10 years impacted all 3 branches of the industry and in particular Video Surveillance, but its only in the last 3 years through IP networks and ONVIF that integration across all sectors has delivered more elegant and cost effective solutions. However integration has now advanced to IoT and the Building Internet of Things (BIoT), that’s joining all the Building Automation services in the building eventually on one two way network. This will create an open, comprehensive solutions that will not rely on human intervention to control them.
Today we can deliver advanced integrated security systems designed to provide a view of all relevant data points, enabling security personnel to quickly scan and mentally understand highly involved, intricate and sophisticated building intelligence. As identified in our report, companies are now experimenting with Big Data and AI to refine and speed up the process.
This will require strategic alliances to be formed between companies across all the Building Automation Services and will have a major impact on the routes to market. Now is the time to get involved.