The IP Video Financial Threat
Investors examining the video surveillance market must properly distinguish between secular and cyclical trends [link no longer available]. This issue is nicely demonstrated in an investor's analysis of Vicon, one of the elder CCTV incumbents. The investor argues that video surveillance is heavily dependent on new construction and the overall macroeconomic environment. He concludes that given Vicon's low valuation metrics, Vicon may be a good investment opportunity as the economy recovers.
His analysis focuses on the cyclical aspect while missing the key secular issue. Specifically, the migration to IP has increased risk to all incumbents (Vicon, Pelco, Honeywell, Dedicated Micros, Tyco Security, etc.) that their businesses while never recover to previously revenue or profit levels. IP migration may shift financial power to new entrants, increasing the risk that incumbents are marginalized or forced out of the market. When looking at the chart of Vicon's 15 year revenue levels, another interpretation is that Vicon never recovered from its pre-Bubble 1.0 peak because it was already losing ground to digital and that coming out of this recession, its future peak may be significantly lower than during the last expansion.
While the fate of each CCTV incumbent is clearly impacted by their own strategic decisions, the risks and financial pressure on all of them must factor in the probability that they do not meet the challenge in migrating to IP.