The State of the VMS Market 2010

Author: John Honovich, Published on Sep 12, 2010

Video Management Software is undergoing a violent transformation. Evolving from its niche beginnings, VMS has matured into a core component of video surveillance. However, the current shifts are stronger and faster than the market has ever experienced.

Indeed, VMS is the segment in most flux. The megapixel market is growing well and smoothly, with incremental innovation and increasing suppliers. The video analytics market is rather subdued (save for BRS Labs' BS).

By contrast, the VMS market is being hit by numerous forces. From:

Incumbents are attacking, new entrants are cutting into the low end of the market and standards are reducing traditional competitive differentiation.

On the other hand, the overall demand for Video Management Software is robust. The growth of IP cameras and the increasing cost effectiveness of Commercial Off the Shelf PCs and storage drives the overall market.

However, which individual solutions are best and what specific companies will thrive are very much open (and debatable) questions.

In the past year, we have conducted thousands of hours of testing and analysis on enterprise VMS systems, budget VMS systems, VSaaS offerings and more. Leveraging this, we examine the status and future of the market.

Inside this premium section, we answer the following 10 questions/issues:

  1. What impact are IP camera 'standards' having on the market?
  2. What is the future of NVR/DVR appliances?
  3. How will Milestone's moves effect VMS competitors?
  4. What threat do the VSaaS providers hold?
  5. What impact will the growing use of mobile devices have on the VMS market?
  6. Are video analytics changing the use or selection of VMS?
  7. How will PSIM change the VMS market?
  8. What will become the key foundations for success in the VMS market?
  9. What VMS companies are most at risk?
  10. What VMS companies are most likely to benefit?

What impact are IP camera 'standards' having on the market?

2010 has proven that IP camera 'standards' will become a real force in the market very soon. As we have examined throughout the year, the production adoption of IP camera standards is growing. ONVIF clearly leads the way with over 40 manufacturers declaring production ready support. With a deep and broad support base, ONVIF is reaching critical mass where adoption by the rest of the market becomes increasingly valuable (the network effect).

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Given their already strong strong adoption, we believe next year, 2011, will be the year that IP camera standards start significantly impacting the market with broad end user implementations.

Such adoption will be beneficial for the overall IP camera and VMS market as it will allow greater freedom for users to mix and match the best products for their price and needs (regardless of proprietary support implementations).

On the other hand, camera 'standards' will reduce an important element of competitive advantage for companies with the greatest proprietary IP camera support - namely, Milestone, NUUO, Luxriot, Genetec, to name some of the most well known providers. Of course, this does not eliminate the overall advantages they have. However, it forces them to compete on different dimensions.

For VMS providers with poor or limited camera support, this will enable them to quickly resolve a key deficiency. Most importantly, this means new entrants and smaller teams can now enter the market at lower cost. In our assessment of budget VMS suppliers, a key problem is the common reliance on JPEG streams as the 'lowest common denominator' camera integration technique. While this reduces the VMS developer's development costs, it has placed them at a significant advantage. This handicap is about to be removed.

What is the future of NVR/DVR appliances?

While appliances will remain a tool for multi-site 'cookie' cutter deployments, we believe appliances will increasingly be replaced by VMS software, especially in the lower half of the market where appliances have traditionally been strong.

The continuous increase in cost-efficiency for COTS PCs and storage plus on-line VMS distribution makes the business case for NVR/DVR appliances harder and harder. Unlike 5 years, almost any PC today (even 'cheap' ones) are capable of recording 10-30 channels of video. With IP cameras eliminating the need for encoder cards, the need for building DVRs with encoders on-board diminishes as well.

With VMS software becoming so cheap, the total cost of a 'DIY' recorder is significantly less than what appliance providers can charge. Let's say you have 16 cameras: $1000 for hardware/storage is generally sufficient, add $800 for software and the total cost is under $2,000. It's hard for appliance manufacturers to match that price as they mark-up costs to re-sell hardware.

At the high end of the market (hundreds of cameras), VMS software already dominates and there seems to be no reason to suggest that buyers will return to the proprietary boxes they rejected over the last few years.

We think the greatest hope or opportunity for appliances is using NAS appliances with VMS software pre-loaded (see QNAP as an example). Bundling NAS and VMS provides a relatively inexpensive means to deliver surveillance with no software setup and the added benefit of built-in storage redundancy (difficult with off-the shelf PCs). However, a limited number of good NAS/VMS appliances are available (with relatively unsophisticated software).

What impact will on-line sales and distribution of VMS software have?

On-line sales remains a minimal force in the VMS software market. However, on-line distribution continues to be a positive force.

On-line distribution helps users and integrators easily try and learn VMS software. This has certainly helped in the migration from appliances to VMS software. An evaluator can try a half dozen VMS applications in a day in comparison to the shipping (and often purchasing required) for appliances. Unsurprisingly, the overwhelming majority of VMS software provider makes it easy to access their software. This has helped VMS software providers gain a disproportionate mindshare relative to appliance manufacturers and VMS providers who closely guard their software (e.g., NICE, Verint, Genetec, DVTel).

On the other hand, on-line sales of VMS software is surprisingly low (at least surprisingly relative to the overall software market). The best example of this is Milestone who, despite its free offerings and price drops, still forces users to buy even the $49 per channel version through their dealers. Only a very few of the smaller budget VMS providers sell direct.

While we understand this from an industry perspective, from a software distribution viewpoint, it is bizarre and, more importantly, inefficient. We believe that as new entrants come into the VMS market (especially from the mobile side), VMS software will increasing be sold direct to end users (cutting own the channel). On the other hand, this may not become prominent until 2012.

How will Milestone's moves effect VMS competitors?

We believe Milestons's aggressive actions threaten to commotidize the low end of the market. The rationale appears to be that if they dominate the low end, they can maximize their overall profits by being the first choice of upgrading users who eventually buy their higher end offerings.

Prior to Milestone's moves, there was a status quo at the low end of the market with per channel pricing of about $100. However, Milestone has destroyed that. We are somewhat surprised that we have not seen more rapid reaction by smaller competitors but we think it's impossible that most competitors (with entry level packages) will not respond with lower prices in the next 6 month.

While the free offering is handicapped, our testing shows that the 25 camera offering is as good or better (with much lower costs) than most of the budget or entry level options on the market.

Undoubtedly, Milestone has the marketing and distribution 'muscle' to make their lower price offerings known and available globally.

The dozens of smaller VMS providers across the world are likely to be squeezed by Milestone's actions. If they don't match price, revenue growth will be stunted (or decline). If they do match, unit volume may increase but overall revenue is still likely to decline (due to the much lower unit price).

The key exception to the squeeze are providers that have higher end offerings or packages to provide. We examine this at the end of the report in the 'winners' and 'losers' section.

What threat do the VSaaS providers hold?

At the VSaaS provider's monthly recurring price points of $10 per camera or more, we do not see VSaaS having a significant impact on the VMS market. For some early adopters with one or two cameras, we believe this will be attractive. For everyone else, it will be hard to justify.

Those reservations noted, we do believe that the ease of use many VSaaS providers from plug n play setup is a feature/value that users will embrace. We suspect successful VSaaS providers will adjust their pricing to be similar to VMS pricing (or to eliminate monthly service charges).

We do not see many VMS providers attempting to integrate plug n play remote access into their offerings. However, if and when providers make this move, this will certainly provide the adopters a competitive advantage.

What impact will the growing use of mobile devices have on the VMS market?

We believe the mobile market will be a key catalyst for change. Two elements drive this:

  • Different business model for mobile developers
  • Incumbent deficiency in mobile applications

Unlike traditional VMS developers, mobile application developers have 'grown up' in a business environment where selling software at $2 to $10 to large number of users directly is the norm. As such their teams tend to be engineering dominated with minimal sales and marketing expenditures. We think such teams are a dangerous threat to the status quo.

Surveillance incumbents, for the most part part, cannot imagine a world where surveillance products are sold direct and over the Internet for very little money each. Their world is one of channel sales, sales managers and markups.

From the position of mobile developers, the VMS market should appear very attractive. Take a company such as iCam whose product we recently tested.  The product has over 3,000 reviews and we would suspect over 30,000 purchases in the last year. At $5 per license and subtracting Apple's 30% cut, the developer has probably made over $100,000 in the last year. Unsustainable for a traditional surveillance company but likely quite profitable for an independent developer with no sales, marketing or PR forces. [Note the developer of iCam only lists 2 employees while developing numerous applications.]

We think not only can these companies survive but they can thrive against big VMS companies like Milestone offering handicapped version for applications designed for complex use case.

We believe more mobile VMS offerings will appear, they will incorporate 'standards' and improve their base capabilities. This will undoubtedly be enhanced by the rapid overall growth in the mobile market.

Are video analytics changing the use or selection of VMS?

Video analytics is not a driving force in VMS selection nor market competitiveness. While video analytics continues to be used and is important for certain applications, neither supporting nor bundling video analytics are significant factors for VMS providers.

With the slow pace of product innovation for video analytics in 2010 and little reason to anticipate a pickup in 2011 (due to poor/no profits and weak/no investment), we do not expect this trend to change for the near future.

How will PSIM change the VMS market?

We believe PSIM, or at least, advanced integration and monitoring, will become key elements for VMS providers that survive this sea change. With so many VMS providers, standards eliminating a conventional source of advantage and prices declining, VMS providers must offer increase value to grow revenue.

This general trend should not be a surprise as VMS providers have been moving 'up market' for years adding in enterprise management, security system integration, redundancy, video distribution over the last few years.

We think most VMS providers will continue to add in advanced integration and monitoring and that this will increasingly blur the line between PSIM focused providers and advanced VMS offerings.

On the other hand, we are skeptical that VMS providers will buy PSIM companies. The primary barrier is the significant amount of redundancy between today's advanced VMS offerings and PSIM software. While we certainly could see Cisco purchasing a PSIM offering to complete their relatively basic VMS package, we believe Genetec, Milestone, DVTel, etc. will likely continue to expand their own offerings.

What will become the key foundations for success in the VMS market?

We believe these approaches will be the most successful:

  • Purpose built low end offerings developed by small teams and sold online for low prices
  • Freemium business model for the middle of the market - broad adoption globally, solid products, free or cheap to start provides the basics for sustainable advantage for a few providers
  • Advanced management functionalities that are best in class sold through the channel for a premium - a few very strong technological offerings that become the choice for large scale deployments
  • Bundled solutions of cameras, storage, servers, software, analytics - strong but not the most advanced VMS software enhanced by turnkey solutions that reduce deployment risk for large users

'Losers' - What VMS companies are most at risk?

We think a number of approaches and VMS companies are specifically at risk:

  • 'Cheap standalone VMS software' - example: NUUO. Milestone is making it impossible to sell on 'cheapness'. NUUO's VMS software is not sophisticated enough to compete at the higher end of the market. The same concerns exist for Luxriot (which we think is technologically better and more cost-effective than NUUO but still facing the same fundamental challenges).
  • 'Budget VMS offerings' - example: our budget VMS series. It's hard to imagine a strong future for any of these companies. Perhaps they can cost? It seems too difficult for most of them to move upmarket without relatively massive investment.
  • 'Companies stuck in the middle'- examples: Lensec, Salient, VideoInsight (and those are just the Texas companies). The challenge for most of the independent VMS software providers is that they cannot become cheap enough to become on-line VMS providers so they will have to compete up-market to deliver more advanced offerings. Perhaps some can but we think the majority will struggle.

'Winners' - What VMS companies are most likely to benefit?

Above, we noted 4 approaches or templates for success:

  • Purpose built low end offerings developed by small teams and sold online for low prices. We believe will see companies like iCam (or companies better) enter the market, expand and dominate the home, SOHO and even some of the lower parts of the small business market. They will sell direct, at low cost and use the Internet as their main sales tool.
  • Freemium business model for the middle of the market - broad adoption globally, solid products, free or cheap to start provides the basics for sustainable advantage for a few providers. Since Milestone is setting the agenda by forcing the issue and leveraging their existing strengths, we think they will most likely increase their share of the mid-market of a dozen to 100 camera deployments.
  • Advanced management functionalities that are best in class sold through the channel for a premium - a few very strong technological offerings that become the choice for large scale deployments. We believe companies like Genetec and DVTel that have clearly demonstrated the commitment to developing dozens of very advanced capabilities have the edge here.
  • Bundled solutions of cameras, storage, servers, software, analytics - strong but not the most advanced VMS software enhanced by turnkey solutions that reduce deployment risk for large users. In this segment, we believe the larger incumbents (such as NICE and Verint) have the greatest chance for success, catering to large, risk averse organizations who need stable, moderately complex systems but not the most advanced technologies.

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