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Security Alarm Services & Smart Homes: Industry Overview and Performance

Industry Overview

The Security Alarm Services industry sells, installs, repairs, and monitors security alarm systems, including burglar alarms, fire alarms, and locking devices.  The industry’s main products and services consist of residential and nonresidential security alarm systems with monitoring as well as residential and nonresidential security system and lock installation without monitoring.  Similar industries include the Alarm, Horn, and Traffic Equipment Manufacturing industry, Auto Parts industry, and Security Services industry.

Industry Performance

According to an IBISWorld industry report, the Security Alarm Services industry expanded over the five years to 2016, with revenue growing at an average annual rate of 4.3% to $22.5 billion.  Industry growth is primarily influenced by the level of residential and commercial construction, changes in per capita disposable income, home improvement spending, and the crime rate.  The industry has also experienced significant consolidation due to increased competition in recent years, leaving ADT with a market share of 15.1%, the largest in the industry.  This period of consolidation has led to value-added products and services as well as the application of new technologies in the industry.  As a result, IBISWorld expects industry revenue to increase at an annualized rate of 2.5% to $25.5 billion by 2021.

Recent growth in the Security Alarm Services industry can be explained by overall positive economic conditions. The primary factors driving industry growth include the increased level of residential and commercial development.  As both residential and nonresidential production rise, the demand for security systems also rises.  In addition, favorable changes in per capita disposable income and home improvement spending will increase industry demand.  As IBISWorld suggests, consumers with greater disposable income are more likely to invest in security system services.  Similarly, as consumers invest more in home improvement, security system services are likely to capture a piece of that investment.  By 2021, IBISWorld projects per capita disposable income to rise at an annual average rate of 1.9% and home improvement spending to increase at an annualized rate of 2.9%.  Lastly, the crime rate, which is expected to marginally decrease in the United States, is another key determinant of demand for security system services.

Despite recent consolidation, including mergers and acquisitions, IBISWorld expected the number of companies in the Security Alarm Services industry to increase at an average annual rate of 2.4% to 56,549 by 2016.  Nonetheless, recent acquisitions by major industry players have continued to shake-up the industry.  For example, ADT acquired Devcon Security and Reliance Protectron Services in 2013 and 2014, respectively.  In February 2016, Apollo Global Management acquired ADT, therefore merging it with Apollo’s Protection One and ASG.  However, the emergence of digital home features and smart devices (including proliferation of smart home technologies) has attracted other players to the industry.  In 2013, AT&T launched its own security service, Digital Life, causing other companies, like Comcast, Cox, Time Warner, and Verizon, to follow suit.  In 2014, Google acquired Nest Labs for $3.2 billion in its effort to compete in the digital home service and security space.  Industry heavyweights have responded to this mounting competition by forging new partnerships, such as that between ADT and Ford Motor Company, to enhance the features of existing products and services.  Thus, the industry is expected to become increasingly competitive due to its attractive revenue growth and low barriers to entry.  As a result, IBISWorld anticipates average profit margins to decrease to 3.4% of revenue, and expects the number of companies in the Security Alarm Services industry to grow at an average annual rate of 3.2% to 66,463 by 2021.

Products & Markets

The Security Alarm Services industry operates in residential and nonresidential segments, supporting residential, commercial, and government clients.  In the United States, the industry is distributed proportional to the population with the largest markets being the Southeast, West, and Mid-Atlantic markets.

The largest source of revenue comes from the segment offering security and alarm system services with monitoring.  This segment includes video surveillance systems, electronic access control, and remote monitoring services, such as close-circuit television surveillance (CCTV) and biometric installations.  The residential market is very large with a narrow range of product demand compared to the smaller commercial market that demands a wide range of products and services.  For example, the nonresidential segment also needs fire detection and alarm and suppression systems, such as carbon monoxide detection and automatic sprinkler systems.  Some commercial clients may even setup a total building management system, which integrates climate control, energy management, fire safety, and security lighting.  Other clients may require industry-specific services, such as the use of RFID to track merchandise for retail clients.  According to IBISWorld’s 2016 industry report, the residential portion of this segment accounted for 48% of industry revenue while the nonresidential portion accounted for 26.6% of industry revenue.

This leaves the other segment offering security system and lock installation without monitoring with roughly a quarter of industry revenue.  This segment provides for the installation, repair, and maintenance of fire, lock, and security systems.  This includes the installation of non-electronic security measures, such as locks, safes, vaults, and key duplication.  Revenue from this segment has declined in recent years as many consumers switch to more expensive and sophisticated security systems with monitoring.  According to IBISWorld’s 2016 industry report, the residential portion of this segment accounted for 9.2% of industry revenue while the nonresidential portion accounted for 16.2% of industry revenue.

The residential market, which comprises of single-family and multi-family housing, is the largest client segment.  This segment is sensitive to economic cycles because its demand closely ties to the level of new housing starts and home improvement spending.  Residential clients typically sign multi-year service contracts, providing industry players with recurring revenue streams.  ADT, for example, labeled 93% of its revenue as recurring, according to its 2015 annual statement.  IBISWorld estimates the household segment accounted for 51% of industry revenue in 2016.

The nonresidential or commercial market is the second largest client segment.  This segment encompasses a variety of clients, including retail stores and other businesses, and its demand most closely ties to corporate profits.  Industry operators often engage in the leasing of goods and equipment designed specifically for commercial clients.  IBISWorld estimates the commercial segment accounted for 37% of industry revenue in 2016.

Government clients represent the smallest, most stable segment and include federal, state, and local governments and agencies. Governments use security alarm services to assist in monitoring parks, public transportation systems, and other public places.  Since 9/11, and most recently the San Bernadino and Paris attacks, government demand for security services has ramped up in an effort to better protect the public and prevent future attacks.  IBISWorld estimates the government segment accounted for 12% of industry revenue in 2016.

In the United States, the regional presence of the Security Alarm Services industry directly relates to population size and density.   Therefore, the Southeast, West, and Mid-Atlantic regions represent the largest markets.  The Southeast market contains the highest share of the population, and thus the greatest number of industry establishments.  IBISWorld estimates the Southeast provides roughly a quarter of industry revenue and includes 28.5% of total industry establishments, with Florida dominating the region with 9.6% of total industry establishments.  The Mid-Atlantic market ranks second in the distribution of industry establishments to population.  IBISWorld estimates the Mid-Atlantic includes 18% of total industry establishments, with New York contributing to just under half of regional establishments.  The West market contains the third-highest proportion of industry establishments, but musters the highest revenue per establishment of any region.  California serves as the backbone of this region because of its massive population size, high rates of burglary, and susceptibility to wildfires.  IBISWorld estimates the West includes 16% of total industry establishments, with California dominating the region with 11.3% of total industry establishments, the most of any state.  Other notable markets include the Great Lakes and Southwest regions, each of which accounts for just over 10% of total industry establishments.

Competitive Landscape

The U.S. Security Alarm Services industry is highly fragmented with a low market share concentration.  The industry is primarily composed of a significant number of small businesses that often serve as subcontractors for market leaders.  Therefore, ADT is easily the largest player in the market, producing about 15% of total industry revenue.  However, IBISWorld estimates that 82% of the industry total consists of businesses with less than 10 employees and 91.2% of the industry total consists of businesses with less than 20 employees.

Additionally, IBISWorld identified six key success factors for firms in the Security Alarm Services industry.  These factors suggest that companies must: (1) comply with government regulations, such as government fire regulations; (2) employ effective cost controls because of the industry’s low profit margins; (3) rapidly implement new technologies; (4) tailor its services to the unique needs of each client; (5) demonstrate in-depth technical knowledge of its products; (6) be able to compete on tender, as that’s how most large jobs are advertised.

Furthermore, the cost structure of the U.S. Security Alarm Services industry differs from that of the sector as a whole.  The largest discrepancies between industry average and sector average occur in the profits, purchases, wages, and other costs as a percentage of revenue.  Despite increasing profit margins in recent years, industry profits are considerably less than the sector average and are expected to decline marginally going forward.  In 2016, IBISWorld estimated profits at 3.5% of industry revenue compared to the 6.5% sector average.  The cost of goods sold also differs dramatically from the sector average and represents the largest cost for the average company in the Security Alarm Services industry.  The emergence of new technology in the industry has contributed to the rising cost of goods sold, although most of these costs are passed on to the customer.  In 2016, IBISWorld estimated purchases at 34.6% of industry revenue compared to the 18.7% sector average.  Average industry wages also deviate from the sector average, representing a relatively smaller percentage of revenue.  Even though industry wage expenses are almost half the sector average, they still represent the second-largest expense for the average operator in the Security Alarm Systems industry.  Wage expenses within the industry have experienced slight decline in recent years, but are expected to gradually increase as companies ramp up hiring to meet demand.  In 2016, IBISWorld estimated wages at 28.6% of industry revenue compared to the 51.1% sector average.  Lastly, the average firm in the Security Alarm Systems industry incurs higher miscellaneous costs than the sector average.  These costs include rent and utility, depreciation, marketing, administrative, insurance, and legal and accounting expenses.  According to IBISWorld, rent and utility costs and marketing costs represented the largest portion of these other expenses, accounting for 4.4% and 2.2% of industry revenue in 2016, respectively.  In 2016, IBISWorld estimated other costs at 26% of industry revenue compared to the 16.4% sector average.

IBISWorld has also performed additional analysis on the Security Alarm Services industry regarding competition, barriers to entry, and globalization.  IBISWorld believes there is a moderate level of competition with a steady trend.  The increased competition stems from both internal and external competitors.  Internally, operators compete on the basis of installation costs and recurring subscription fees.  Although operators offer various pricing structures, product and service costs are primarily a function of the sophistication of the technology involved.  Externally, the Security Services industry, which provides security guards and cash transport services, poses the greatest threat to the Security Alarm Services industry.  Recent technological advancements in home automation and mobile accessibility have attracted competitors from other industries, including AT&T and Google.  Even though there is an increasing trend of barriers to entry, these external competitors are able to fold into the industry largely because of their already established IT infrastructure.  However, many companies will be dissuaded from entering the Security Alarm Services industry because of the technology-driven competition that is applying downward pressure on the industry’s already tight margins.  Moreover, the level of consolidation activity suggests that the industry is in the mature phase of its life cycle, thus deterring new entrants.  Nevertheless, the lack of market share concentration serves as an attractive quality for new businesses entering the space.  Finally, there is very little globalization occurring in the Security Alarm Services industry, as only major industry players, like ADT, operate on an international scale.

Major Companies

ADT Security Services Inc. (originally the American District Telegraph Company) is currently the largest operator in the U.S. Security Alarm Systems industry with approximately 15.1% market share.  The company’s name brands include ADT, ADT Pulse, and Companion Service.  ADT provides traditional electronic security and detection systems while its ADT Pulse service enables users to remotely monitor and control their home automation features.  Because of the future potential of its remote home automation service, ADT has begun to allocate more capital to market and develop its ADT Pulse service.

In recent years, ADT has experienced moderate organic growth, although most of its growth in revenue and market share has come through acquisitions.  For example, in 2010, ADT acquired industry competitor Broadview Security, along with its 1.3 million customers, for about $2 billion.  In August 2013, ADT bought Devcon Security for $148.5 million, and, in July 2014, acquired Reliance Protectron Services for over $500 million.  Beyond its strategic acquisitions, ADT also forged new partnerships with tech heavyweights like Google.  In November 2015, ADT expanded its partnership with Google’s Nest in order to offer seamless integration between the Nest Learning Thermostat and the ADT Pulse system.  Nevertheless, ADT’s acquisitions, and its subsequent restructuring costs, have pressured margins over the years.  Moreover, Apollo Global Management’s $7 billion acquisition of ADT in February 2016 will likely exacerbate these costs going forward.  Ultimately, IBISWorld expected ADT’s revenue to increase steadily through 2016 at an annualized rate of 3.2% to $3.4 billion.

Tyco International is the second-largest operator in the U.S. Security Alarm Services industry with approximately 3.1% market share.  In its 2015 fiscal year, the company posted total revenue of about $10 billion.  However, because Tyco is primarily a manufacturer of fire and security alarm systems, most of its revenue is included in the Alarm, Horn, and Traffic Control Equipment Manufacturing industry revenue data.  On the other hand, any of Tyco’s recurring revenue associated with its monitoring and maintenance contracts will be factored into the Security Alarm Services industry revenue data.  Therefore, IBISWorld estimated Tyco’s U.S. based Security Alarm Services revenue to be $698 million in 2016.

Protection One Inc. is the third-largest operator in the U.S. Security Alarm Services industry with approximately 2% market share.  Like ADT, Protection One sought expansion through both organic and inorganic growth.  In April 2007, the company merged with Integrated Alarm Services Group Inc.  In May 2014, the company acquired Pacific Security Integrations.  Then in October 2014, Protection One rolled out its home automation platform, HALO, enabling customers to remotely access and control system features.  Finally, in May 2015, Apollo Global Management acquired Protection One at the same time as its acquisition of ASG Security.  Therefore, upon the completion of Apollo’s February 2016 acquisition of ADT, all three companies (ADT, Protection One, and ASG) were merged into one company under the ADT brand and Apollo’s sole ownership.  When considering Protection One as a separate company, IBISWorld estimated that it supported 1.8 million domestic customers and generated revenues of $457.7 million in 2016.

Operating Conditions

The Security Alarm Services industry is currently less capital intensive than it is labor intensive.  Industry operators rely heavily on labor, having to hire installers and technicians as well as employees responsible for monitoring the systems.  However, the industry experienced a shift in recent years towards more capital intensity as technological advancement has underscored the need for innovation.  Overall, the Security Alarm Services industry has experienced a modest rate of technological change.  New technologies have introduced innovative features to the industry, including home automation, remote access, and total building control systems.  Thus, the opportunity for growth and innovation has motivated external competitors to enter the industry, such as AT&T, Comcast, and Time Warner.  As a result, the industry is likely to experience greater competition and reduced profit margins going forward.

According to IBISWorld, the Security Alarm Services industry has a moderate level of revenue volatility, with year-on-year revenue changes averaging 3.3% annually over the five years to 2016.  Further, IBISWorld suggests that the Security Alarm Services industry is constrained by moderate, but increasing, levels of regulation.  Operators must obtain a license from the state and the majority of regulation involves local fire codes.  Additionally, the industry is subject to regulation involving the marketing of its products.  However, the industry has also benefited from state and federal government mandates that call for the installation and maintenance of fire alarms and sprinklers in new buildings.  Numerous industry associations exist to help companies adhere to all the laws and regulations, including the Security Industry Association and Central Station Alarm Association.  Lastly, the Security Alarm Services industry is receiving little, but increasing, industry assistance.  Most recently, the Department of Homeland Security has facilitated the development of anti-terrorism technology by developing risk management systems and liability protection through its support of the SAFETY Act of 2002.

AnthonyGord