Milestone vs Genetec - Who Will Win?By: John Honovich, Published on Aug 26, 2012
Recently, many investors has asked us about Milestone vs Genetec: Who is better? Who will be bigger? Who will win? In this note, we analyze these questions in-depth, looking at:
- The overall size of the market and these two companies current positioning
- The Current revenue, profitability, installations, brand, distribution and technology of the companies
- The growing difference in market positioning between the two companies
- The key market drivers impacting both in the future
- The likely outcomes for both Milestone and Genetec
- Finally, who will 'win'?
No Winner Take All
These discussions can become highly misleading as no VMS company today is anywhere close to being truly dominant (in the sense of Google or Microsoft). Indeed, it is unrealistic to think any VMS company will ever become one. Presently, even Genetec and Milestone each have less than 10% of VMS software revenue and this excludes the huge amounts of appliances (DVRs and NVRs) being sold. Despite Milestone's very wishful thinking, we see no chance of any VMS company gaining even a third of sales. The global market simply remains far too fragmented with no driving force to consolidate or eliminate competitors. While the Milestone vs Genetec matchup is interesting, regardless of who 'wins', neither will be winning the whole market.
Tale of the Tape
Before we break down their positioning, let's review their basics:
- Revenue: Similar - Genetec's 2011 revenue was ~$53 million, Milestone's revenue was ~$47 million. After excluding non VMS sales, OEM sales, etc., core VMS revenue is fairly close.
- Profitability: Edge Genetec - While Milestone has sacrified profits by design, sources indicate that Genetec is consistently profitable.
- Installations: Edge Milestone - While Genetec may have larger accounts, Milestone has far more accounts and far more users.
- Channels Deployed: Edge Milestone - While Genetec's average selling price is higher, Milestone's low priced offerings clearly drive far more total channels being deployed.
- Brand: Edge Milestone - While Milestone has suffered recently from a series of bizarre of PR blunders, overall Milestone is far better known throughout the world.
- Channel / Distribution: Edge Milestone - Milestone has many more dealers than Genetec and a much more mature global sales force in place.
- Technology: Edge Genetec - Especially at the high end of the market, Genetec leads with technological innovation though Milestone is a fast follower frequently releasing features similar to Genetec one to two years later.
If you are keeping score, the tally is Milestone 4, Genetec 2 (though such an approach is fairly reductionistic).
In the last 3 years, Genetec and Milestone's positioning in the market have shifted significantly. While many think of Genetec as being better in technology and Milestone as better in marketing, we think this contrast, while fair, is not central to determining who will win. Rather, the key differentiator is about market positioning: Milestone is a mass market VMS provider while Genetec is a niche, high end PSIM supplier.
- Mass market VMS provider: Milestone's VMS is available through Internet, ADI, and a vast number of dealers. They offer a free VMS version and two others under $100 per channel (Essential, Express) in addition to high end lines. Milestone has built its business to be a VMS for everyone that can be purchased by everyone.
- Niche, high end PSIM supplier: Genetec's software is highly restricted, available only through a limited number of approved dealers. Rather than match Milestone's moves for super inexpensive VMS software, Genetec has been enhancing its PSIM software, SecurityCenter, that drives deep integration between access, video and other security systems (note: Genetec calls it a 'unified security platform' but, by features, it is a PSIM). Genetec has built its business to be a VMS for more demanding security users delivered by few dealers.
This positioning is a natural outgrowth of the personalities and ambitions of the respected management teams and, even if they wanted, would be extremely painful to fundamentally change. While Milestone could focus more on engineering or Genetec could spend more on marketing, we believe Milestone will remain committed to the mass market while Genetec will focus on the high end.
The question then becomes, "Given how the VMS market will evolve over the next 5 years, how does this impact both companies?"
Key VMS Market Drivers
Let's review those future VMS market drivers:
- IP camera sales decelerating: With IP hitting the tipping point, easy market expansion is coming to an end. While IP camera and VMS sales will continue to grow, they will increasingly converge to the much lower growth rate of the entire surveillance market as the switchover completes.
- Low to mid market faces multiple significant threats from increased embedded appliance use, hosted video and, most importantly edge storage / direct to storage offerings.
- Mid to high end market faces almost no significant threats as the key emerging forces are poorly suited for the complex demands of large systems while the PSIM players are too small and too dependent on existing VMS providers to be disruptive.
Being a mass market provider will be much harder than being a niche high end provider, regardless of how well or poorly one executes, simply because of the external forces companies face.
We expect Genetec to extend its lead at the high end of the market while increasingly retreating from the lower end, partly because this appears to be by design, partly because their positioning naturally drives them in this direction. Because of this, we expect Genetec to become even less known in the 'mass' market but increase their reputation as the best high end VMS / PSIM around the world.
While we believe Genetec's revenue growth rate will be modest over the next decade (15-20% CAGR), it will likely mature into a very lucrative cash cow. Since IP adoption is already overwhelming in the high end of the market, overall growth possibilities are muted. However, price pressures are relativity scarce, large customers find switching to be painful, and Genetec's unified security approach makes their software even more deeply embedded into large accounts. Because of this, as the VMS market moves into maturity, Genetec can increase its profitability even further.
Milestone's current model is unsustainable. As a 13+ year old company that's never generated free cash flow, has radically unrealistic expectations, faces decelerating market growth and increasing competition from new technologies, it is inevitable that they eventually restructure their model. Their master plan for world domination is based on an infeasible assumption that they can grow extremely robustly (40%+) and scale their way to profitability. Sooner or later they will realize (or admit) that they cannot do so and have to change. We see their unprecedented support changes earlier this year is a signal of more to come.
While a lot depends on the changes Milestone makes, we think they will remain an important player across the VMS market so long as they adopt a more sustainable yet less ambitious model. Decelerating IP camera sales and increasing completion from new technology will stop them from getting huge and force them to be more prudent on spending. At that point, we expect them to narrow their focus, instead of trying to sell and develop VMSes for all market segments. Perhaps they will mimic the Genetec model but that would certainly leave them as distant trailer to Genetec as they have a huge head start and commanding product lead in the high end.
Who Will Win?
Neither will 'win' as the recording market diversifies further with the growth of new technologies. However, Genetec is likely to have an easier growth path and robust profitability though with an increasingly narrow market presence. By contrast, the ultimate outcome for Milestone is harder to predict. While Milestone will fall far short of their unrealistic ambitions and need to restructure their model, their revenue level may remain similar to Genetec's but with far lower profitability and more risk.
As for products to use, the market 'winner' is really irrelevant to that. Both Genetec and Milestone are clearly VMSes worthy of serious considerations for many projects, along with numerous other competitors, but that should come down to fit for specific applications, not revenue nor profit generation.
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