In a year that saw many industries continue to be dogged by the Covid-19 pandemic in multiple ways – from finding and retaining qualified labor to product shortages driven by backlogs in the global supply chain – the physical security market actually experienced strong growth in 2021.
According to a report recently published by market research firm Memoori, sales of physical security products reached over $33.8 billion in 2021 and is predicted to maintain a compound annual growth rate (CAGR) of nearly 7.2% over the next five years. Not only were equipment sales up across the board, but there was also a robust market for mergers and acquisitions (M&A) among both product manufacturers and systems integrators this year, with private equity continuing to bet big on the industry’s resilience to the pandemic and other external factors.
The closing weeks of 2021 alone have seen numerous M&A deals that could redefine the industry for years to come. Among these include:
- Oct. 5: Nice, the Italian company that owns abode and Hysecurity, acquires Nortek Control, the maker of 2GIG alarm panels and Linear access control products, for $285 million.
- Nov. 10: Brivo announces its intent to merge with Crown PropTech Acquisitions, a special purpose acquisition company (SPAC) and become a publicly traded company.
- Dec. 1: ACRE, the parent company of Vanderbilt, RS2 Technologies, Open Options, ComNet, and Razberi, acquires Feenics and Matrix Systems.
- Dec. 8: Stanley Black & Decker agrees to sell most of its security assets, including its Commercial Electronic and Healthcare Security business units, to Securitas for $3.2 billion.
To get a better understanding of the drivers that will continue to influence equipment sales and company valuations throughout the market, SecurityInfoWatch.com (SIW) recently caught up with several industry analysts to get their take on the trends to watch in 2022.
Meet the Panel:
- Owen Kell, Senior Security and IoT Research Associate, Memoori
- Josh Woodhouse, Lead Analyst and Founder, Novaira Insights
- Danielle VanZandt, Industry Analyst, Security, Frost & Sullivan
- Oliver Philippou, Research Manager, Physical Security Technologies, Omdia
Following a year that was marked by a pandemic that continues to have a significant impact on the global economy, what security industry trend stood out to you the most in 2021 and how do you expect it to affect the market in 2022?
Kell: It has to be the resilience of the market as a whole, particularly when compared to the other sectors that have been hit much harder by the effects of the pandemic. The latest estimates from the World Bank and IMF indicate that the global economy as a whole grew between 5.6% to 5.9% in 2021. We expect the physical security industry to grow 11.9% year-on-year for 2021, rising above the highs hit back in 2019. Beyond this, the companies that have adapted their offerings to exploit the ways in which the world of work has changed have done well. Thermal camera sales for fever screening applications have died down now, but other solutions that enable improved flexibility, remote monitoring and control and support for Covid-specific measures, such as social distancing, and increased demand for contactless and biometric technologies have all done well over the last year.
Woodhouse: It is hard to pick out just one trend, however; the pandemic seems to have certainly accelerated the move to cloud-based solutions. With sites being closed, functionality typically provided by these solutions have become more valuable. This functionality includes remotely monitoring video, remote camera control and recording management, remote system health maintenance and remote firmware/software patches.
VanZandt: Cloud and remote authentication/access capabilities became incredibly popular throughout 2021, just due to the need for security operators to still find some means of protecting their physical and digital assets from remote conditions. With the stop-and-start nature behind most return-to-work strategies and the post-pandemic era, these capabilities will be critical to keep organizations secure from all types of threats, while still allowing security teams to maintain proper situational awareness. Biometrics and the use of behavioral analytics were also some key talking points that I expect to continue in 2022, just due to the changing nature of how individuals will want to interact with businesses, with the emphasis being placed on personalized experiences, the need for stronger authentication controls, and the use of more personalized credentials outside of usernames and passwords.
Philippou: In 2021, Omdia saw three key trends: 1). Market growth driven by thermal body temperature solutions. The size of thermal body temperature solutions market has rapidly grown to $1.3 billion globally in 2020. Driven by Covid-19 precautions, this technology has been adopted by several regions, in particular China, East Asia, India, and the Middle East. However, without the growth in thermal body temperature solutions, the global video surveillance equipment market declined 3.8% globally in 2020.
2). Geopolitical tension, supply constraints, and AI development driving up camera prices. Omdia expects average selling prices of network cameras to increase in the short term as U.S.-China geopolitical tension and supply chain constraints from the Covid-19 pandemic increases pressure of vendor margins. While in the long term, AI deep learning acceleration and inference at the end point will drive network camera product mix. This will increase the average selling prices of network cameras as increasingly advance camera SOC’s (System-on-Chip) are used.
3). China’s continued dominance. The Chinese video surveillance market is estimated to have grown 6.4% in 2020 compared to the global average of 2.2%. As such, China now accounts for 50% of the global market revenues. However, a combination of Covid-19 and the completion of Xue Liang program has resulted in declining government investment in video surveillance in China.
What do see as the new normal in security from both an operations and a technology perspective that’s trending over the last 22 months?
Kell: Buildings have had hugely varying levels of occupancy over the last 22 months, but managers and building operators have still needed to maintain security even while their buildings lay empty. I think that has helped drive increased demand for adaptability, remote operations and scalability of their security solutions as uncertainties persist in their operating environments. As-a-service offerings for both access control and video surveillance continue to gain ground for this reason, and there are now a real range of established offerings, both “pure-cloud” and hybrid options, that are proving appealing for both large corporations and small- and medium-sized businesses.
Woodhouse: Even before the pandemic, security was being used for much more than to detect and deter crime. Its role in business intelligence and operational requirements was already growing. However, the challenges of COVID-19 have seen it become a core element of organizations protecting people as they move through buildings. In addition to increased multi-use anecdotally, many integrators have also told us of more widespread integrations between previously separate systems, for example, video and access. In many instances, end-users were aware of the advantages of fully integrated security solutions but didn’t see enough to justify costs. However, a pivot to more remote working meant the ability to check-in on the premises remotely across multiple systems in a single dashboard has been a big driver. Increasing use of cloud resources also plays a part here.
VanZandt: Data is now the central foundation behind any modern security strategy. If an organization is overtly relying on manned, manual operations and not looking to upgrade legacy systems to more digital platforms, they are quickly falling behind the industry standard and leaving themselves vulnerable. The pandemic only served to highlight how over-reliance on manned security actions leaves organizations vulnerable to targeted threats, as well as more indirect, unpredictable events. Not only do security operations require robust data collection, analysis, and response capabilities, but relying on homogenous data sets leaves significant gaps in security teams’ situational awareness. The ability to synthesize multiple data types, sources, and analyze them as one comprehensive view will be essential for security teams to keep up with today’s more complex threats.
Philippou: As the global economy starts to adapt to this new normal, the security industry has taken a central role. Indeed, Covid seems to have accelerated several existing trends. Perhaps most notably, the list of problems the security industry is being looked to solve has grown significantly, and includes building management integration, business operations and analytics, and health and safety. Furthermore, it has helped to accelerate demand for cloud solutions, and acceptance of RMR business model in general.
Given the ongoing shortages brought about the lingering supply chain crunch, how will product manufacturers and systems integrators react and address these challenges as we move into 2022 and when do you expect these issues to abate?
Kell: The pressure on semiconductor production, in particular, is both unprecedented and pronounced and that has been much discussed, but costs are also up across the board, for everything from shipping to raw materials to components, such as cases, cables, lenses, and packing materials, so it’s a real issue. These costs will eventually get passed onto customers if they aren’t starting to be already. Experts from the logistics domain seem divided on when the overall supply chain challenges might ease off, with expectations ranging from around six months’ time, to some even expecting challenging conditions to persist throughout 2022. Many manufacturers and integrators have now worked through their stocks, and we’re hearing a lot of murmurs of potential price rises on the horizon.
We’ve also seen a lot of talk about improving supply chain resilience moving forward, with “re-shoring” or increased regionalization of production capacity on the agenda for various manufacturers, but even if that is the intent moving forward, we haven’t observed much concrete evidence of it in the security industry so far. Making profound changes to the supply chain of any industry is not an easy process, and companies have spent years and sometimes decades building relationships, manufacturing facilities and logistics operations to support their legacy supply chain networks, so if change does come, we expect it to be more noticeable over a 5–10-year period, rather than in the next 12 months.
Woodhouse: The supply chain crunch is leading to higher prices for security equipment. It is one major reason why Novaira Insights estimates that the average price of a network camera in the world excluding China has increased by 7.6% in 2021. However, there will continue to be supply chain issues in at least the first half of 2022. It is therefore also likely that the price of security equipment will continue to rise.
VanZandt: We did see a little bit of this throughout the early days of the pandemic period, where many product manufacturers were trying to see what other functions and uses, they could re-configure existing systems and hardware devices to take care of additional functions. This continued testing and re-configuring of existing systems and components will unfortunately be with us until this supply crunch starts to abate. While I cannot give a good idea of when these issues could start to abate, it will depend on how quickly some more regionalized or local systems integrators and manufacturers can potentially help customers waiting for new supplies or components to catch up on their backlog.
Philippou: The degree to which supply chain disruptions have affected integrators has been varied. Some larger integrators have been able to mitigate the impact of component shortages by devoting more resources to procurement, exploring alternative technology options, and adapting solution design to match availability.
Was there a prominent trend or development in the security market that you thought really failed to materialize during the course of 2021?
Kell: We’re much more dubious about the potential for 5G to “revolutionize the market” than many 5G proponents and some market analysts. It was never going to have much of an impact in 2021 anyway, as coverage remains patchy, but even moving forward, we see it mainly being used for niche rather than mainstream security applications. Data service costs (at least for the next five years or so) are highly likely to be prohibitive and even beyond this, the vast majority of sites where cameras are deployed already have access to reliable high-speed broadband connections, negating the key benefits of 5G.
Woodhouse: Novaira Insights estimates that the world market for body temperature solutions was worth less than $100,000 in 2019. It grew massively to almost $1 billion in 2020 as organizations installed these solutions in response to the Covid-19 pandemic. It is estimated that the market for these solutions has plummeted to just a few million dollars in 2021 as organizations have learned how best to respond to the challenges presented by the ongoing pandemic.
VanZandt: Cybersecurity integration with physical security systems still seems to be a slower development throughout the industry, despite how often we discuss how “cybersecurity principles” are being introduced into digital systems running physical security activities. Many of these integrations remain very basic and focus on digital access, rather than actually looking at significant cybersecurity threats. However, the rise of digital intelligence vendors within the security industry are better positioned to synthesize cyber and physical data sets together in order to identify the more prominent converged security threats. As more security vendors pivot to include these more synthesized intelligence capabilities, it will better enable the industry to really offer concrete solutions to the converged security threat.
As it relates to the U.S. market, how do you see the Secure Equipment Act, NDAA, etc., influencing the industry in 2022 and beyond?
Kell: It has put some real pressure on the major Chinese manufacturers in the North American market, but the growth, size and degree of government support they receive in their domestic markets mean that the big two, Hikvision and Dahua, continue to do just fine. It has definitely opened the door for more non-Chinese firms in the U.S. video surveillance market though and will help to dilute historic focus on price competition, perhaps allowing some more innovative solutions to shine through. From a European point of view, we continue to monitor the potential impact on both the UK and EU markets as well, in part due to U.S. government influence, but in part due to shared concerns regarding human rights and national security concerns. Similar debates are ongoing amongst politicians in several European countries that may eventually lead to similar trading restrictions placed on Chinese firms in these countries too.
We can also envisage a scenario where reciprocal market barriers and “Unreliable Entity Lists” brought in by the Chinese government essentially split the market into a kind of two-track system, as has been the case in the case of the internet ecosystem in China, with the Chinese market operating under one set of rules, standards, technologies and market players, and the majority of the rest of the world operating under a different but somewhat parallel set of rules.
Woodhouse: Compliant suppliers are well placed to gain market share in the U.S. These acts have already shown the beginnings of disrupting the status quo in the competitive landscape in the US market.
VanZandt: The U.S. market has already shown that these acts do not significantly affect the security spending in the market and finally adds some teeth to the bans that have been floating around the public sector markets for the last few years. If anything, the main effect for the U.S. market will likely be that more domestic security vendors will see increasing interest from customers looking to get rid of equipment that is on the listed entities declaration and can find new opportunities by emphasizing their domestic manufacturing capabilities. In more far-reaching implications, it could lead other allied nations to consider these listed security risks and potentially shift how they approach their new security technology purchases. This will likely be a more longer-term activity though, based on how these laws move the U.S. market and its spending habits.
We’ve seen a flurry of M&A activity towards the end of this year among both security vendors and integrators. Do you expect to see more or fewer deals in 2022 and what do you expect to be the primary driving factors?
Kell: Some of the deals this year have been huge in historical terms, notably Teledyne’s FLIR acquisition for $8 billion, Allied Universal’s buyout of G4S for $5.3 billion, and the most recent Securitas acquisition of Stanley Black & Decker also coming in at $3.2 billion. So, in terms of total value of companies acquired, the totals seen in 2021 feel unlikely to be beaten for a while, but you never know.
In terms of the number of deals seen in 2021, we track from the beginning of November to the end of September in each of our annual reports on the industry, and for this analysis, 2021 saw a total of 38 deals, which is pretty close the 15-year average of 40. I think there is a good chance this will be beaten in 2022. The overall consolidation drive looks set to continue, driven in part by supply chain issues, and there is a clear appetite to acquire valuable IP around several growing market opportunity areas including as-a-service/cloud business models and AI analytics.
Woodhouse: Many improvements in security system functionality are being driven by software. Innovative security software vendors have therefore been a target for acquisitions in recent years and this will continue. Also, as mentioned earlier, the importance of cloud is growing in the security space. This is likely to mean that suppliers of cloud-based solutions will increasingly become acquisition targets.
VanZandt: I don’t expect that the pace of M&A activity will abide in 2022 just yet, as we are still witnessing the effects of the pandemic era on security spending. Most niche or point solutions throughout the industry will continue to be the main acquisition targets, as larger vendors will look to acquire specific capabilities as a way to expand their product lines or enter new customer markets in this method, rather than going through the internal development stage to do it themselves. Among integrators though, we may see some slowdown in the M&A activity, as many vendors are wanting to keep themselves out of the integrator role and are happy to partner with a network of other integrators for customer outreach and support, rather than taking on those capabilities internally. Integrators will also likely be seen more as better partners than M&A targets as the shift to more service-based business models take hold in the industry and integrators can better serve in that advisory and support role, while also maintaining close ties with their technology partners.
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