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State of the Industry 2012

How will the emergence of cloud-based systems affect the custom industry in 2012 after a flat 2011 with 4.5% dip in median revenues?


Jason Knott · January 3, 2012

Notwithstanding the Mayan calendar predictions for 2012, integrators are facing some challenging questions about the future, especially related to the effects of cloud-based content on their ability to sell “black boxes.”

That uncertainty was certainly reflected in the 2012 CE Pro State of the Industry special report that shows the typical custom integration firm continues to be a lean-and-mean operation with four employees earning a median $541,000 in 2011. That revenue figure represents a 4.5 percent decline from the previous year, while the employee figure is the same as 2010 and down from a high of seven employees back in 2007.

It also marks the third year in the past four in which median revenues have declined, albeit 2011’s data is by far the best of the down years (2008 showed an 11 percent decrease and 2009 showed a 51 percent decline. Last year, in 2010, median revenues were up 6.5 percent).

Interestingly, large integrators did not experience a similar decline in revenues in 2011. Overall, 78 percent of companies in the CE Pro 100 report increased revenues this year, with 15 percent flat and only 8 percent down. What does this tell us? That larger integrators have found the right mix for profitability and growth, whether that be in regards to staffing levels or technology adoption.

Indeed, new technologies like installing LED lighting and offering Personal Emergency Response Systems (PERS) are more likely to be adopted by larger integrators than smaller because they have available manpower. At the same time, larger integrators are more likely to have recurring monthly revenue in place than small dealers, who even if they do install alarm systems, are more likely to sell those accounts to a monitoring company.

In terms of installations, dealers anticipate doing more jobs next year, but at a lower price. Dealers expect to do 35 installations this year compared with 25 in 2011 - that’s a 40 percent hike.

However, the median installation price is expected to fall 10 percent from $15,000 to $13,500. Again, that change is likely being driven by the extreme price pressure changes taking place in key categories like touchpanels and flat panel TVs.

In terms of new opportunities, integrators once again identified streaming media and high-end home controls as the most promising.

Perspective on the ‘New Economy’
Of course, the “new economy” is much more than just slumping new housing these days, which started the industry’s woes several years back. Today, the challenges facing dealers are technology based, as massive change takes place in the technologies that homeowners use to control their audio and video. Integrators find themselves continuing to lose the product margins in certain categories, such as home automation and control, which in the past have been their saviors for profitability.

imageAt the same time, cloud technology is forcing some categories of equipment, such as media servers, CD players and even Blu-ray players, to struggle to stay relevant. Integrators still must sell and install “black boxes” for clients to access the cloud, albeit much smaller and less-expensive ones. Even once untouchable categories like equipment racks may soon feel the effects as the need for devices get smaller, according to some integrators.

Here, in a nutshell, is what many dealers are facing. The business model of the past decade has enabled dealers to earn an average of 70 percent of their revenue from equipment sales and 30 percent from labor, according to Steve Firszt of Fast Forward Business Consulting. At the same, time the typical integrator was able to earn an average of 38 percent gross profit on equipment.

In the “new economy,” dealers are only taking home 20 percent gross profit on their equipment sales - that’s nearly half of what they made in their traditional business models by marking up products. The labor-centric business model for profitability is already being adapted in the IT and commercial arenas. Recurring revenue appears to be one way to stem the tide of lower profitability.

According to IMS Research, 50 percent of a typical security installation firm’s income will be derived from recurring revenue sources by the year 2015. That compares with a paltry 8 percent of a typical custom installer’s income derived from recurring revenue. Indeed, one out of every four A/V dealers derives no money at all in recurring revenue, according to CE Pro data.

imageAt the same time business models are being turned topsy-turvy, an influx of low-cost, entry-level systems is hitting the market led by security and phone/cable companies. Most dealers are opting not to play in this subsidized business model area, but it’s only a matter of time before consumers adopt a price perception for lighting control and HVAC control based on those offerings.

Less Optimism; Bigger Players
The 2011 CE Pro Readership Study represents a broad sample of the audience. This year, 366 viable responses were received, representing a statistically significant portion of the industry. The total number of responses, however, was down slightly from last year. Many companies have simply gone out of business or don’t wish to report their revenues.


  About the Author

Jason Knott is Chief Content Officer for Emerald Expositions Connected Brands. Jason has covered low-voltage electronics as an editor since 1990, serving as editor and publisher of Security Sales & Integration. He joined CE Pro in 2000 and serves as Editor-in-Chief of that brand. He served as chairman of the Security Industry Association’s Education Committee from 2000-2004 and sat on the board of that association from 1998-2002. He is also a former board member of the Alarm Industry Research and Educational Foundation. He has been a member of the CEDIA Business Working Group since 2010. Jason graduated from the University of Southern California. Have a suggestion or a topic you want to read more about? Email Jason at jason.knott@emeraldexpo.com

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