How VMS Pricing Impacts DVR / Appliance Sales

The recent price cut for Milestone's entry level offering is likely to impact the pricing and sales volume of the DVR / hybrid DVR market.

Fundamentally, VMS software and DVRs are substitutes. The more attractive one of these offerings becomes, the less attractive the other does. If one offering's price decreases and everything else remains the same, the other category's sales volume will decrease.

Here's an analogy: when you eat, you have 2 options: (1) going to the store so you can cook for yourself or (2) eat at restaurant. You are likely to pay a premium for a restaurant because they provide a turn key solution. The restaurtant is like a DVR appliance, VMS software is like food at the store.

If the price of food drops and restaurant prices stay the same, many people are likely to eat more at home. Restaurants seeing this are likely to drop prices or face lower customers. This is common sense.

Let's compare this concretely to DVRs and VMS software using estimates. A 16 channel DVR with 1TB of storage may be $3,000 MSRP.  16 channel VMS software may cost $2000 MSRP ($100-$125 license per channel) plus the cost of the PC/storage and setup. The all in VMS system may be $3,500 - $4,000.

Now, take Milestone's price cut from over $100 to $50 MSRP per channel. Now, that same 16 channel VMS software is $800 (down from $2,000) and the overall cost is $2,300 to $2,800.

While we can vary the assumptions, the trend is clear - significant VMS price decrease improves the attractiveness of VMS solutions relative to DVRs. Even if the DVR solution is still 'better' in some ways, decreased price gap makes it easier to pick VMS software.

The industry has gone through this cycle in the past 5 years. In the middle of the last decade, 16 channel DVRs regularly had an MSRP of $10,000 or more. Smart users realized that their was an arbitrage opportunity to purchase VMS licenses and build it themselves for less. This alternative contributed to the ongoing price decline of DVRs.

We expect the Milestone move (and other providers responding) to put further pressure on the DVR market.