2009 IP Video Market Forecast

IP Video market growth will slow by 66% next year due to the unfolding financial implosion. It is critical for all of us to understand where it will slow, why it will slow and how the impact will be most felt. This report provides projections for 2009 revenue growth factoring in macroeconomic changes.

Here are the key projections:

• IP Video market will grow 15% in 2009
• Growth rate will shrink by 66% compared to 2008
• Megapixel camera growth rate will be 30% in 2009
• Video Analytic growth rate will be -10% in 2009
• IP cameras and video management software growth will be 15% in 2009

The easy credit for consumers and businesses that characterized the last 5 years is certainly over. My projections assume that the current financial meltdown will be resolved and that basic liquidity will be restored to the marketplace. Nonetheless, even with this assumed, the regulatory and cultural pressures to restrain risky loans will leave credit far tighter relative to the past 5 years. This will have significant impact on both GDP growth and business investments.

Furthermore, the immediate credit crisis is not yet resolved (as of 10/21/08). Some indicators demonstrate a strengthening of the credit market. Nonetheless, even if we assume the credit markets return to some semblance of normalcy in the next few months, damage has been done. Not only will this delay many projects in the short term, the layoffs and cuts in spending made during this period will materially shrink overall economic growth, reducing the incentives for customers to invest in new capital projects like IP video systems.

Wealth Reduction Will Cripple Consumer Spending

On the consumer side, the massive drop in both housing prices and equity will cause consumers to spend far less than previously. Consumer spending accounts for approximately 70% of GDP.  A large percentage of historical consumer spending has been driven by easy credit and continuous increases in housing and equity prices. Expect this process to reverse over the next few years, causing GDP growth to be negative.

Contrasting our current situation to the last recession shows the severe impact of the disappearance of housing driven spending. The chart below demonstrates the GDP in the last recession without mortgage equity withdrawals. Essentially, the mortgage equity withdrawals saved economic growth during the last recession. This, obviously, will not be the case this time.

Capital Intensive Projects Will Largely Be Delayed

With consumers spending less and credit being tighter, business will have to delay many capital intensive projects.  Both the ability to justify such projects through market growth and the capacity to obtain financing will extremely difficult.

IP Video is, by definition, a capital project. And since IP Video depends on new projects or replacement of analog CCTV systems deployed within the last few years, customers will need to obtain capital or draw down on cash reserves to purchase IP video systems. The financial pressure to resist will be intense. The ability to maintain existing CCTV system will be fairly easy – especially considered so many of these systems have been deployed in the last 3 years. Stretching out the life of your CCTV systems for an extra year will generally be very feasibly.

Reports on delayed projects are already coming in. For instance, Severin Sorensen commented, “publicly you have firms such as GE Capital that have announced to companies such as Sonic QSR that they have suspended their future growth capital for franchise expansion; you also have much fewer security system lease finance opportunities as evidenced by the drop-out of many commercial leasing lines. These are not opinions, but facts. So unless clients have cash, or access to credit to finance their security systems requirements, they will not be installed; or they will be installed in smaller increments. Municipalities that are dependent on bond related finance are struggling to fill their borrowing lines. For instance, last month New Haven withdrew their bond raise as it could not be filled, and the state of Connecticut was able to only partially fill their bond requirement.“

Also see the New York Times citing examples of capital projects being cut in the hospital sector, a segment that one might ordinarily think would be resistant to such cuts. Finally, note a number of large companies are cutting or freezing IT spending – most notably and ironically, SAP's recent decision to “not order any new equipment at this time [link no longer available].”

Pressure to Cut Costs in Security Will Be Significant

Security veterans know that the first thing businesses want to cut is almost always security. None of us likes this, the least of which is the Security Director, forced to handle an almost impossible situation. Nonetheless, this is a well defined pattern in business because security is viewed as a cost center.

Security departments are much more likely to hire guards to handle increases in crime. With the inevitable rise in unemployment, the cost of people will decrease. Also, people are an operating expense and resources dedicated to them can quickly be pulled or adjusted. This provides much greater financial flexibility than an IP video system.

But Why Don't They Just Move IP Video to IT?

This is a common rebuttal to the claim that security costs will be cut. This, of course, begs the questions: (1) is the business case for IP video really there (see below for discussion) and (2) how do you justify the costs of a migration from analog to IP during a recession.

As I argue earlier, the general response will be to keep analog and delay projects until after the contraction eases (unlikely in 2009).

IP Video for Marketing and Operations Will Be Postponed

Despite the hype for using IP Video for marketing and operations, such use is certainly more experiment than proven solution. I have conducted significant research in this topic and the only application I see widely used and proven is people counting. People counting is fine but given that it will only be used at a few cameras per facility, the growth it will generate will be modest.

Unproven technologies will be shunned as the climate for risk decreases. This will have a significant impact on both video analytics in general and the expansion of IP video in retail.

Weak ROI of IP Video Will Be Exposed

The ROI of IP video is generally weak. According to Axis' own numbers, the TCO reduction is only 5-10%. To a CFO, especially in a recession, these will not be attractive, especially since Axis falsely and misleadingly assumes that customers do not already have analog cabling and analog cameras in place (this is a very biased and flawed assumption). The problems of IP video will be exposed.

A rule of thumb often cited is that innovative technologies should reduce costs by 80%. One example is T1s versus cable modems. Cable modems provided 'good enough' high speed bandwidth at 70% less costs. This caused large migration from T1 to cable modem for Internet use. Unfortunately, IP Video offers such strength in eliminating analog fiber systems relevant to only a small fraction of security buyers.

This claim has generated significant opposition but none so far of the detailed quantitative variety. As a general claim, the most authoritative of IP video proponents is the Axis study above. Such TCO reduction may be sufficient during a bull market but will be very difficult to justify in a time where costs are much more carefully examined.

The Outcome

Because of these factors, I expect general IP video spending to fall significantly to only 15% growth. Megapixel cameras will do better because it is an emerging technology with high value.  However, the market for video analytics will shrink by 10% as capital constraints and hesitancy to take risks cause purchasers to postpone.

The rationale for IP video to continue to grow is that (1) its total size of the market is still small and (2) there are niches where IP video has a strong business case. Nonetheless, the super high growth of the last few years (40%+) will be essentially impossible for the industry to replicate in these conditions (note, that does not mean that individual vendors cannot achieve 40%+ growth).

Now let's examine the impact on a per market segment basis:

By Market Segment

Banking

Banking is likely to be the hardest hit sector in IP video. Heavy bank losses are already severely reducing budgets. Consolidation of banks will cause reductions in branches. Perhaps most importantly, the end of the housing boom will remove one of the key profit centers of bank branches – loan originations. The vast expansion of bank branches will likely be reversed as branches become less profitable. Given the small size of most bank branches, IP video was a weak fit historically. None of the recent economic events will improve the situation.

Retail

The two largest sources of IP video growth, economic expansion and business intelligence, in retail are being undermined. With consumer spending being hard hit, new store roll-outs are likely to be dramatically reduced. Similarly, with profits significantly reduced (or losses being incurred), expect retailers to be much more reluctant to spend (even more so than normal). Expect many chains to file bankruptcy as the credit crunch and the reduction in consumer spending impact the market. Finally, despite the hype for business intelligence, the technology is more experimental than production ready. The big growth for business intelligence promised will not materialize in 2009.

Education

Education is one of, if not the strongest, segments in IP video. The fundamental economics will remain or increase in strength. The key risk for education is access to capital. Public schools in many municipalities will face tough budget cuts. Private schools are already facing massive losses in their endowments. This is bound, at least, to cause delays in many projects.

Defense

In the US and Europe, we are witnessing a major shift from stopping terror to stopping financial ruin as key governmental priority. Unfortunately, the fight against terrorism was a major driver of IP video adoption. With the priorities shifting and budgets becoming tighter, expect more security and defense projects to be cut. Specifically, in the US, given current projections, an Obama victory would almost certainly result in significant delays and likely large reductions in defense spending. Such impact would be felt almost immediately after the election as the departments put projects on hold, awaiting word on the impact of the governmental change.

But I am Not Seeing this Impact? (November 2008)

There is a lag, or delay, between economic events and business impacts. Take the sub-prime mortgage crisis. This problem first broke 15 months ago but the practical impact only started to be felt 6 or 9 months later. Likewise, the unwinding will intensify as layoffs increase, cutbacks in consumer spending as they realize that good times are gone (for now), budget shortfalls by governments reduce government spending, etc., etc.

Nonetheless, circumstances will vary. Some companies are already feeling the impact but others may not. I am hearing numerous reports about projects being “delayed a quarter.” The risky thing about such delays is that many of these projects will eventually be canceled. The economy will certainly continue to weaken in the foreseeable future, putting further pressure on those projects.

What if Crime Goes up?

Crime, and terrorism, are two wild cards in the growth of the market. From a purely business perspective, the demand for video surveillance to combat terrorism is clearly down relative to the first half of the decade. I will not speculate on the probability of a terrorist event. Nonetheless, if a serious one was to occur, this would certainly drive demand for video surveillance.

As for crime, the two questions for crime are (1) how much will crime grow and (2) how will security managers respond to the growth in crime. Consider reading a balanced treatment of the potential for recession driven rise in crime from the New York Times. It is reasonable to assume crime will rise as early reports are indicating increases already. What is difficult to predict is how high crime will rise.

One thing that is less difficult to predict is the choices security managers will use to defend against crime. The most effective means is generally security guards (despite the negative reputation). The least expensive means is generally intrusion detection systems. I would expect these would be explored first and most heavily to handle increases in crime. At the same time, depending on the application and the level of crime, video surveillance should experience increase demand as well. However, it is unlikely that this will significantly offset the general economic reduction nor the tightening of capital.

Is this just for the US?

This phenomenon is most pronounced in the US and in Northern Europe and it will, by definition, impact those regions most directly and significantly. However, given the sheer size of those regions and their importance to IP video (probably 50% of the total world market), the impact will be significant. Moreover, given the roles these regions play in the world economy, they will indirectly impact IP video spending in the rest of the world as their lack of spending reduces growth in other areas (for instance, lower oil prices for OPEC countries and less manufacturing/electronics sales from Asia).

On a country by country basis, the impact will obviously vary. I cannot provide a fair forecast for each country as it requires a careful consideration of many factors – some global and highly negative and some local and highly positive. For instance, in Canada, where they have largely avoided the housing crash, the market performance should be stronger than the US.

What about for 2010 and beyond?

Predicting conditions in 2010 and beyond demands wild guesses. We need to see more how the economy evolves and IP video vendors respond. The depth of the crisis is still unclear and its resolution depends on what macroeconomic policies and regulations are put in place. On the vendor side, its inevitable that multiple acquisitions will be made, a number of manufacturers will exist, numerous manufacturers will shift strategies and pricing will be dropped. Depending on what combination of these events occur and by whom will greatly influence the conditions in 2010.

That being said, recessions usually improve markets in the long run by clearing out laggards and pushing companies to innovate to deliver more value.