Market Insight

Security Start-Up Numbers Soar – Have the Barriers to Entry Ever Been So Low?

October 10, 2017

Jim Dearing Jim Dearing Analyst, Access Control & Fire

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Homeowners worldwide have more security options available to them now than ever before. If you needed to purchase a home alarm or video surveillance system ten years ago, typically you had two options: go to a professional solution provider or do it yourself. Since most all the equipment was wired and – for the most part – lacked interoperability, few were confident enough to go it alone.

Things are different today, and we have hundreds of security systems available for doorstep delivery at the click of a button. How did this all change so quickly?

New market entrants change the face of the industry

  • A variety of multi-system operators (MSOs), including Comcast, AT&T and Cox Communications took the US intrusion market by storm in 2013-2015
  • According to IHS Markit consumer video surveillance research, in 2015 companies that were two years old or less accounted for 6 percent of global consumer video-camera market revenues. By 2016, this had grown to over 9 percent
  • Global DIY intrusion equipment market revenues are forecast to grow at an average of nearly 20 percent per year from 2016 through 2021 according to the latest data from the Alarm and Monitoring Intelligence Service
  • At the time of writing, eight active security camera projects and over 100 smart home device active projects seeking backers on Kickstarter

Why is this happening?

Finding an original equipment manufacturer (OEM) has never been so easy. Ambitious entrepreneurs need only look as far as 1688.com or Alibaba.com to find a variety of affordable options with reasonable minimum-order requirements (MOQs). These suppliers not only speak English but also have experience producing US/EU market-ready products. Ten years ago this was rare, indeed.

Making products in Asia is not new for the security industry, but sourcing it online is. In the past, setting up manufacturing agreements or facilities was somewhat of an art form, with Western companies needing assistance or an outright local presence, to manage the careful balancing act of affordability vs. quality vs. the risk of patented technology being stolen. With the help of review systems, virtual factory tours, and third-party quality assurance services, an increasing number of Western suppliers believe it is no longer necessary to visit their factories in person, according to IHS Markit.

Lower MOQs make it possible for smaller companies with limited budgets to bring a system to market. Additionally, they allow companies from other industries to test out market demand with less potential downside. The OEMs’ stock offerings have improved dramatically. Even five years ago a large proportion of these suppliers specialized in producing a very narrow range of product types in order to win the race-to-the-bottom on pricing. As the OEMs have grown in size they have widened their ranges. Now prospective western buyers can commission a full security system, complete with its own basic mobile application.

Software is king – More frequently, innovation comes in the form of software and services rather than hardware. Security hardware innovation is an expensive process that also typically requires special equipment or facilities. With the exception of the cost of hiring developers – which remains expensive – unique software or services are easier to attain for smaller companies.

Funding is easier to come by – Kickstarter and similar crowd funding platforms provide prospective entrepreneurs with access to thousands of potential investors. These funding opportunities encourage new market entrants, but also give companies that would have launched anyway a better chance of surviving their early years due to the free marketing and sales leads generated from the fundraising process.

Surging demand for DIY security – The popularity and affordability of plug-and-play wireless security devices has grown over the past five years, which were two of the main barriers to adoption of DIY solutions. The higher price of devices and a challenging installation, have become less of an issue for consumers. This is important for two reasons:

  • Suppliers aiming their products at the DIY market typically have fewer requirements to meet before they can start selling their product. For example, an alarm system aimed at the higher-end commercial market would need to go through rigorous testing to meet various grading requirements before it could be sold. Additionally the manufacturer would also have to build relationships with local dealers in order to get them to sell the new product.
  • As the DIY market continues to become a more viable source of revenue, an increasing number of companies will become willing to invest in it – therefore further inflating the number of new players.

How will this affect traditional security providers?

The residential consumer security space is a very different animal to the professional security industry. As shown by the likes of Dropcam in 2013 and Ring in 2015, ground-breaking innovative solutions can accumulate market share very quickly. The easier it is to bring a new security system to market, the greater the probability that a new company will emerge next year and do the very same.

Lower market entry costs also mean that current market leaders have to be more wary of copycat solutions. As the number of competitors in a market increases, suppliers find it increasingly difficult to differentiate themselves. This often devolves into more aggressive price competition, which current market incumbents should eventually win due to their greater economies of scale. This is great news for consumers, but not so much for the suppliers’ margins.

Another potential concern for current market leaders is the growing strength of the OEMs in Asia. As they grow in size it is only a matter of time until they try their hand at selling direct to Western markets. This has been seen time and time again in the security industry with the likes of Hikvision and Dahua and also recently on the consumer side with Foscam Shenzhen and Amcrest. The OEMs present a unique threat to current market incumbents because of the OEMs ability to undercut them on prices, according to IHS Markit.

Remaining challenges for future security start-ups

Despite the impressive growth rates touted by companies, consumer-grade security market revenues remain dwarfed by that of the professional security industry. For example, the DIY market accounted for just 2 percent of global intrusion equipment revenues in 2016. Consumer video fared better, but still only accounted for less than 9 percent of the video surveillance market. This is important because it means for the foreseeable future professional security players that are also active in the consumer space will continue to enjoy the advantages lower production costs and larger marketing budgets.

The retail brick and mortar sales channel – a channel of varying levels of importance depending on geographic region – remains very much closed to smaller players. Unless the supplier can prove itself through consistently outstanding market demand, it has very little chance of securing a place on the shelves of a large big box retailer.

Interoperability is becoming a key consumer concern. Consumers are now more wary of purchasing products that will not be able to integrate with their existing security/smart home devices. Future start-ups will need to allocate additional developer resources to ensuring that their systems are as open as possible.

Research by Market
Security Technology
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