Milestone Moves Into Silicon Valley

Hey Mark Zuckerberg, you've got a new friend - Milestone Systems is coming to town! The über ambitious VMS developer is expanding yet again - with a new office in Silicon Valley and a new business unit led by yet another former Microsoft employee. In this note, we examine the positioning and potential of this.

Let's first review the key details of the announcement:

• Claim: "Accelerates Innovative Developments" - No specific product or technology innovation is in the announcement but a rough outline of how they are going to pursue it is.
• "Adding Silicon Valley location" - This is prominently highlighted at the top of the release and repeatedly throughout, indicating how important Milestone thinks the Silicon Valley aspect is. This looks to be for business development, not software.
• Business unit is to be "Incubation and Ventures" explained by Milestone as relating "to organic product innovations that can be developed and taken to commercial success" as well as joint ventures, mergers and acquisitions.
• New VP [link no longer available] worked at Microsoft from 2002-2008 and aims to "to contribute up to 25 percent of Milestone’s growth in the long run"

Since this is an aspirational release wrapped around a new hiring announcement, what's most telling is Milestone's focus:

• Growth: Mentioned 5 times in the release, clearly Milestone is focused on accelerating growth, something that is no surprise given their world domination plan but still much different than their competitors who, while they may be growing faster, are typically equally concerned with profitability and internal development.
• Silicon Valley: Tying into the growth focus, emphasizing Silicon Valley matches well given the hyper growth of many tech companies based there.
• Microsoft: Milestone continues to hire ex Microsoft employees (the new head of tech support [link no longer available] is from Microsoft as well) and emphasize the Milestone / Microsoft relationship.

Can This Succeed?

Just last week, we declared that Milestone was unrealistically ambitious and setting itself up for a major correction. This is a clear example to us of Milestone overextending themselves. Indeed, it feels like something out of the Onion or 1999 (when Microsoft was relevant and the first tech bubble had yet to burst).

Love it or hate it, one thing is clear: no video surveillance manufacturer has ever opened up a Silicon Valley office for such a purpose. Indeed, no video surveillance from Silicon Valley has ever become a major player (e.g., 3VR, Intransa, Proximex). Either this will prove to be a genius move for Milestone or a foolish waste of time and money.

The best part we see is that it's a great 'rah rah' announcement especially for the naïve. This can be used as a talking point about how Milestone is expanding and doing things no one else is doing.

The problem we see is delivering growth via this strategy. Silicon Valley and physical security don't mix. The Valley's focused on b2c with a heavy emphasis on social, local and mobile and wants companies that can have hockey stick growth to hundreds of millions in a few years. The physical security industry is pretty much the opposite of everything the Valley values. That's why the Valley has so little impact on our industry despite revolutionizing so many others.

Now, Milestone has been recently emphasizing VMS's role in 'optimizing business processes' and being 'more than security [link no longer available]', a point reiterated in this announcement. Of course, lots of VMSes are used for 'more than security' and there's no clear explanation of why Milestone can disproportionately capture such uses. Could Milestone somehow acquire, partner or merge with a Valley company outside of security? Perhaps that's their tactic.

The most likely outcome is that this gets Milestone some good press, they eventually do some minor deals that have little overall impact and they continue to burn cash. In their defense, and as the lotto saying goes, "You got to be in it to win it". Milestone is certainly taking a shot at the big prize but the odds look long against them.