Forecast: 200% Growth IP Video Surveillance 2010-2012

Author: John Honovich, Published on Nov 19, 2009

Over the next 3 years, attacks against analog CCTV will accelerate on all sides. We forecast IP video surveillance product sales will increase by 200% total between 2010 and 2012, significantly disrupting and overtaking analog CCTV sales.

We are now bullish on the growth of IP video driven by recent widespread advances in product offering and pricing.

[Update Dec 2010: Forecast is on pace. Read our 2010 / 2011 IP Sales Surge review.]

Why Now?

Last year, we projected a significant slowdown in IP video spending as the global economic markets imploded. This slowdown certainly occurred, documented in the deteriorated financial performance of most leading video surveillance companies.

However, in the last year, important advances in new products offered by both up-start and incumbent manufacturers have significantly enhanced the competitiveness of IP video.

What's Driving This Growth

We see 5 main drives behind this projected rapid growth:

  • Mainstream 720p/1.3MP cameras cut into the cost advantage of analog cameras
  • Mainstream hybrid DVRs remove the barriers of legacy deployments to migrate to IP
  • Emerging managed/hosted video undermines analog's advantages in small deployments
  • Emerging panoramic cameras further cut the cost advantage of analog cameras
  • Maturing IP camera standards will cut costs and reduce complexity

In 2009, significant advances have occurred in all of these areas.

Where Does this Projection Come from?

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This is our theory based on non-public information we have gathered from over 100 sources on sales, product roadmaps and trends. It assumes weak economic growth over the 3 year period, limited overall growth in video surveillance and no major terrorist actions. A V-shaped recovery and/or terrorist events could enable the market to exceed this projection. A double dip secondary recession or growth of HDcctv could cause the market to underperform this projection.

What Does this Projection Mean?

We believe IP video growth will significantly outperform current industry expectations of 25 - 35% annual growth. While forecasting the future in a period of economic turmoil is more art than science, we are confident that IP video will gain the upper hand in general commercial deployments during this period.

Inside this report, we examine in-depth the factors driving this growth and the impact this is likely to have on industry participants.

Examining the Meaning of the Forecast

Forecasts can be dangerous and misleading, often over-stating the confidence and the likelihood of future events. We want to be clear about the meaning of the forecast.

The key takeways are that

  • IP video growth will accelerate faster than the general consensus 
  • IP video will become critical to the mid-market and entry level market, a significant change from early adoption

On the other hand, readers should note the following limitations:

  • We do not believe the global economy has stabilized or fixed the problems that caused the 'economic implosion'. However, the emergency measures implemented may drive growth for years or collapse in the next few months. It is difficult to determine at this stage (Oct 2009). While the global economy absolutely will impact the industry, we believe IP video products are maturing to the point that the shift will progress and accelerate even if the economy falters again (though certainly at a lower rate than a healthy economy).
  • We do not offer per year growth nor do we even list a Compounded Annual Growth Rate (standard in such reports - usually stated as "36.7% CAGR, etc.". These metrics assign a level of accuracy that is simply impossible to reasonably make given the numerous unknown and rapidly changing parameters (economic growth rates, changes in crime/terrorism, timing of new product releases, etc.).
  • We choose 200% specifically because it is is a 'round' number in between two other potential scenarios. 100% would be growth moderately slower than the last 3 years. 300% would be massive growth leaving IP at close to 80% of total annual sales. 200% represents a middle point that reflects faster growth due to improved supply.
  • We only project 3 years out, instead of 5 years commonly offered. As we contend below, it is simply not possible to even reasonably guess at the maturity of technology 5 years from today. Since such technology development will be the key driver in projecting growth, we refrain from using such a long period.

The Overall Video Surveillance Market

This forecast focuses on the specific growth of IP video surveillance segment, rather than the growth of the overall video surveillance market (that is analog cameras and non-hybrid DVRs).

Given that the overall video surveillance market is fairly mature, its growth will be driven primarily by external factors to the market that are difficult to predict in the economy's current state. Specifically:

  • The Global Economy: As demonstrated in the last year, overall demand for video surveillance is significantly dependent on overall economic growth.
  • Crime: Video surveillance benefits from higher crime rates.
  • Terrorism: Perhaps the largest driver, the importance of terrorist events for driving growth in the video surveillance market's is demonstrated in the US in 2002-2007 and ongoing in India since 2008.

Various analysts have projected global video surveillance growth between 3% and 15% over the next 5 years. Any number in this range is plausible depending on the 3 factors above.

We expect low impact on overall video surveillance growth from new IP products. Most customers will likely be replacing existing analog video surveillance products at a cost level similar to previous systems. For the overall market to grow substantially, IP video would need to significantly drive new markets or motivate existing customers to spend notably more on replacement systems.

Demand for IP Does Not Need to Improve

In economic terms, demand increases when consumers are willing to buy more of a given product at the same price level. In this sense, we do not believe demand will increase significantly nor does it have to for significant growth to occur.

Outside of an academic context, this may seem like word games. However, we want to be clear about why we believe consumers will buy more IP video products - because supply is improving.

Improvements in Supply Key to Growth

The rate of supply improvement in IP video products will drive the rate of overall growth in the market. 

By supply improvement, we mean:

  • More manufacturers offering IP video products at current prices (e.g., analog CCTV incumbents)
  • Existing or new manufacturers offering current IP video products at lower prices (e.g., budget suppliers)
  • New products released that accomplish existing tasks at lower prices (e.g., panoramic cameras)

These factors enable greater consumption of IP video.

Importance of Incumbent Manufacturer Support

Support of IP video by incumbent manufacturers can and will dramatically impact the overall growth of IP video.

Incumbents have significant market power in the physical security market. To the extent that incumbents do not offer nor promote IP video, IP video's growth is constrained. While buyers may 'lose' from such an approach, most buyers will be too 'locked in' to existing incumbents to move to IP video.

Even for those that do switch, the IP video new entrants are too small to rapidly push a switch to IP video. Most of the IP video leaders generate $20 - $50 Million USD in revenue - too small for an approximately $10 Billion USD market to transform the industry by themselves - even if they doubled each year.  The one positive outlier is Axis, who at approximately $300 Million USD annual revenue is 5x larger than any other IP video manufacturer. However, Axis's stalled growth shows that it cannot lead the transformation by itself.

On the positive side, incumbent CCTV manufacturers have rapidly expanded their IP video product lines in the last 18 months. Equally importantly, top line revenue growth now depends on it. In our survey of publicly traded companies, almost every analog CCTV company's revenues were 10% (or more) lower than 12 months ago. Incumbents are appreciating the best way to motivate their existing incumbent base to buy new products is to offer IP - such as hybrid DVRs and megapixel cameras.

Existing Products Drive Growth in Immediate 3 Years

For both incumbent and new entrant manufacturers, we believe the best means to project future growth is to examine the changes in product offerings and the ability of those new products to spur customer buying. In doing this, we focus on the immediate 3 years.

Products that will drive significant growth over the next 3 years are already available and fundamentally sound. This is because technologies require time for  'productizing' and marketing. It takes multiple years to reduce costs, add secondary but critical features, integrate with 3rd party systems, build distribution channels, educate the market, etc.

New important technologies will certainly emerge between 2010 and 2012 - such as more advanced analytics - and sales may grow quickly for that technology. However, in a short period of time, no novel technology can generate the level of revenues necessary to impact significantly the overall market. The innovative company may generate tens of millions of revenue but it would be less than 1% of the overall market.

Why "Innovation" is Not Needed for IP Growth

As such, from a technology perspective, the 5 drivers we examine below may seem uninnovative because the technology has already been validated over the last few years. However, it's this prior development and distribution that positions these technologies to have a strong real-world impact.

Driver 1: Mainstream 720p/1.3MP cameras

While megapixel is 'hot' in 2009, we believe that the sweet spot for large-scale product adoption will be in cameras providing 1280 x 720 resolution (720p) or 1.3 MP cameras. 

Our rationale is that these cameras provide the most cost-effective increase in overall usability/value for general applications. Specifically:

  • These cameras double the horizontal resolution compared to traditional Standard Definition cameras (1280 x 640). In most applications, it is the horizontal resolution that is most important (scenes are usually wide but not tall). Doubling the area covered by a camera will have an immediate impact on lowering the number of cameras needed in an area.
  • The price differential between analog CCTV cameras and equivalent form factor 720p/1.3 MP cameras is 2x or less. Given that the megapixel camera can cover twice the area, eliminates the cost of 1 VMS license and the cost of a second camera installation, the price per unit of performance is lower.
  • The processing power required, bandwidth consumed, low light and WDR performance are all more reasonable and easy to optimize than their higher resolution counterparts (e.g., 2 MP, 3MP, 5 MP).
  • Product availability is very broad. Almost all manufacturers (high end IP, analog incumbent, low end budget) offer these products.
These products are ready and and are having an impact currently. This impact will accelerate and continue for the entire 2010 to 2012 period. 
In sum, customers will be motivated to purchase these products, suppliers will almost universally offer them and the performance will be solid and reliable.

Driver 2: Mainstream hybrid DVRs

In the mid-market, which we generally define as business and government organizations with 10 - 100 cameras per site, 90% or more have DVRs, almost all of which do not support IP cameras. Because customers would be forced to buy new equipment and likely change suppliers, this is a significant logistical and operational issue.

This has changed significantly over the last 2 years. A number of suppliers (such as Pelco and Dedicated Micros) are providing software upgrades so that existing DVRs can use IP cameras. More generally, incumbent manufacturers are adding hybrid DVR options to their product lineup. These new appliances tend to cost the same price or only slightly more than their non-hybrid alternatives.

At the end of 2009, hybrid DVR offerings have become commonplace for incumbent analog manufacturers and we are starting to see even leading IP video upstarts offer hybrid DVRs (such as Genetec).

While customers could use encoder appliances separate from servers for many years, hybrid DVRs are significantly less expensive and complex to set up for the majority of deployments in the industry that are between 8 and 32 cameras.

We see incumbent analog manufacturers advocating the use of hybrid DVRs immediately and along with the sale of 720p/1.3 MP cameras. Indeed, the combination of hybrid DVRs and megapixel cameras will be one of the most powerful and practical way to convert mainstream and late adopters to IP.

A significant limitation in the expansion of hybrid DVRs is in the low end / budget segment of the market. In this market, 16 channel DVRs under $2,000 USD are typical. We do not see hybrid DVRs being widely developed and offered in this segment. To the contrary, many manufacturers cite lack of interest in IP. The lower end of the market will likely remain resistant to hybrid DVRs. We believe managed/hosted video will be the key IP challenger for this segment but that this driver will be later than the immediate impact of hybrid DVRs.

Driver 3: Emerging managed/hosted video

Managed/hosted video is seemingly the new gold rush in the video surveillance market. Dozens of companies from around the world have launched product offerings in the last 2 years with new startups announcing each month.

The customer benefit from these services is reducing complexity of setup and cost of equipment while making video access easier. This is being done through the use of a few options: low cost embedded appliances (Envysion), NAS devices (Axis STS) and on-board storage (from multiple early entrants). The goal is to combine IP cameras with inexpensive on-site storage to reduce overall costs and overcome upstream bandwidth limitations.

While significant progress has been made over the last 2 years (this segment basically did not exist then), use of these services are still very limited (relative to the overall market) and steps still need to be made to improve the sophistication of video management in these services and, for many providers, the ease of installation.

The fundamentals are strong but the logistics will require maturation over the next few years. Achieving a price point of $10 per camera per month is realistic and at that point, the motivation to replace analog systems will be high [Note: this price point is for the service only - the cost of cameras is separate.] While 2010 should have a lot of exciting announcements and product improvements, broader use is more likely in 2011-2012.

Driver 4: Emerging panoramic cameras

Panoramic cameras have been around for almost 10 years and for most of that time they have disappointed. However, with the rise of IP cameras and the maturation of megapixel imaging technology, panoramic cameras are about to hit the mainstream. 

The number of manufacturers offer panoramic cameras are still limited -- perhaps 5 - 10 vendors globally with Mobotix and Arecont Vision being the most notable vendors. However, reports both from manufacturers and integrators are consistent in the rapid sales of these cameras. Not surprisingly, in 2010, expect the number of manufacturers of panoramic cameras to double.

Panoramic cameras can cover areas that traditionally needed 3 or 4 cameras. While the cameras tend to cost $1,000 USD to $1,500 USD (end user pricing), the elimination of multiple cameras, installation and VMS licenses creates a clear cost reduction.

While growing fast, use of these cameras are still limited and some types of these cameras require better support. For instance, 360 degree panoramic cameras with fisheye or panomaroph lens require specialized viewing software that is supported by only a limited number of 3rd parties. Indeed, the more common panoramic camera may be the use of multiple imagers in a single enclosure (the Arecont and Scallop Imaging approach).

We expect sales of panoramic cameras to grow rapidly over the next 3 years with the biggest impact on overall sales to occur towards the end of this three year period as supply expands and interoperability improves.

Driver 5: Maturing IP camera standards

At the end of 2009, it has become clear that IP camera standards will become a production reality. By contrast, when the industry groups were formed in 2008, this was unclear, especially since previous efforts at interoperability led by SIA over the middle of the decade did not come to fruition. However, with a number of products already offering production support and a dozen other manufacturers committed to production release by Q1 2010, IP camera interoperability will become a reality.

At the same time, the direct market impact will not be immediately significant. In 2010, the focus will be more on proving interoperability amongst production products and rolling out support. 

However, by 2011 and certainly by 2012, these interoperability specifications will have an impact on making it easier to use IP cameras and potentially less expensive.

What About the Lack of Training?

Training is often cited as a concern and limitation on the growth to IP video. While training is certainly needed, we view the lack of investment in training as a response to historical product offerings rather than as a barrier to IP video. 

To the extent that integrators view IP video products as being valuable to their customer markets (who tend to be mid-sized deployments), they will invest in training. To that point, the increased supply of megapixel cameras and hybrid DVRs should provide that incentive to invest in training.

Secondly, a number of these drivers makes IP video easier:

  • Hybrid DVRs eliminates the need to learn how to install and optimize software on servers, allowing the integrator to follow the same process as traditional analog DVR setup.
  • Managed/Hosted video enables cameras to 'phone home' eliminating the need for integrators to perform complex on-site IT tasks.
  • IP camera standards reduce the complexity in supporting and interfacing with cameras from various manufacturers.
In the next 3 years, the amount of training needed will shrink (relative to historical technologies) and the motivation to conduct training will increase (as products become more viable for the main stream market).

The Role of Video Analytics

In the next 3 years, it is unlikely that video analytics will have a major impact on the growth of IP video or the overall video surveillance market.

The main reason we see for this is limited product offerings and limited recent technological improvements. Because of this, video analytics are not on the verge of 'exploding' or going mainstream.

Going into 2010, little momentum exists behind video analytics either from the user or manufacturer side. Because of this, simply logistically, it is unlikely that sales will significantly improve. Considering that the base of video analytics sales is small to begin with, this combines for limited market impact.

At the same time, it is completely reasonable to believe that video analytics will mature in the next 3 years. If it does and reaches the point where its performance and acceptance is similar to where megapixel cameras are in 2009, video analytics would be poised for explosive growth. However, when that exactly will happen is hard to determine.

Impact on Analog and IP Video Providers

We expect that traditional analog CCTV providers will generate most of the growth in IP video surveillance sales from 2010 - 2012. This is likely to occur through a mixture of organic growth from introducing their own IP video products or from acquisitions of IP video specialists.

Incumbents will benefit from their existing sales channels, their motivation to re-start revenue growth and similar business model of IP video to analog CCTV sales. While many have projected that the incumbents would fall in mass, this has not happened (with incumbents Sony, Panasonic and Bosch being among the top sales leaders in IP video, even at this early stage). Product releases and changed messaging demonstrate that incumbents understand the importance of IP video to continued growth. 

On the other hand, with any substantial change, some incumbents will execute poorly and lose ground. However, they are likely to be the exception rather than the rule.

The bigger threat in the long term is the rise of managed/hosted video which 'flips' the business model for both analog and IP video manufacturers. While both IP and analog depend on selling products through integrators, managed/hosted video will eventually be dominated by service sales sold directly to end users or through low-tech installers. This will be extremely difficult for any incumbent to adapt to as it will force them to change their business model. However, the full impact of this will be later than 2012 as managed/hosted video will require time to evolve and mature.

The Video Surveillance Industry in 2013

At the end of the next 3 years, we see the industry having the following characteristics:

  • While the majority of cameras deployed will certainly still be analog (because of the massive analog base), the majority of systems will be capable of recording and managing IP cameras (either through hybrid DVRs, software only or hosted/managed video). This will make incremental expansion to IP/Megapixel cameras simple.
  • The use of multi-megapixel and panoramic cameras will be commonplace, changing the way systems are designed and reducing the total number of cameras needed per site.
  • Managed/Hosted video will be move from being a hot 'new' trend to a significant force in market adoption. While overall use will likely remain low (less than 5% of the market), managed/hosted video will likely be viewed in 2013 as megapixel cameras are viewed today - a technology poised to be widely adopted.
  • Video analytics will likely reach a point where it is mature, reliable and widely enough adopted for mainstream use, even if the impact on overall use and sales is minor over the next 3 years.

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