Why 2010 will be Worse than 2009

By John Honovich, Published Feb 24, 2009, 04:16pm EST

While admitting a slowdown, video surveillance professionals generally claim that (1) the market will rebound in the second half of this year and (2) that the problem is consumer fear. Discussions with dozens of industry leaders reveal the same pattern with the repeated conclusion that they are 'cautiously optimistic.'

  • This is a fundamental economic restructuring, not a recession
  • The economic drivers of the previous boom will not come back
  • Budgets for 2010 video surveillance will be hammered
  • The crime wave will promote buying the cheapest and least amount of equipment
  • You need to make changes now

Current Assumptions

The current assumptions behind analyst and industry projections is for a recovery in the second half of the year and a return to almost the same growth patterns from before the implosion. However, the analysts I have spoke to are all open minded and realize that this depends on the larger economy returning to form in the next 6 to 12 months.

My point is that assumption is false.

Not a Recession but a Restructuring

Recessions are generally seen as natural parts of the business cycle where growth temporarily stops or slows while the economy is adjusting to natural, short term over-expansion. Recessions do not fundamentally change anything, they simply provide for a temporary readjustment.

What we are going through is not a recession. The issue before us is that the global banking system has essentially failed. Companies around the world took advantage of implicit backing of governments to radically increase leverage [link no longer available]. This obviously collapsed.

When people talk about the problem being fearful consumers, it's misleading. Yes, consumers are fearful but rationally and appropriately so. The US alone has already lost $5 Trillion USD [link no longer available]. And as we are seeing with the deteriorating positions of the largest US banks, this problem is far from over.

There is trillions of dollars of 'fake' wealth that needs to be flushed from the system. This means hundreds of millions of people need to readjust their spending. Of course, this means that almost every company and government will need to adjust to lower spending.

Most importantly, the good old days of limited to no regulation and free wheeling investments is gone. Given that we are now on the verge of riots on the streets, even the most libertarian governments are going to tightly regulate lending and financial activity.

Do Not Expect Growth to Resume to Previous Levels

We will see much stricter financial standards. The problem is that the loose standards is what drove most of the growth of the last decade. For instance, the US expansion was almost entirely driven by increases in home equity values.

Without this driving force, what will grow the economy? We should not take for granted that the economy will simply grow year after year, especially with the withdrawal of the most power force behind the last few decades of economic growth.

We could see years of low to no growth. And even if we do see growth return to previous levels, we will have to find a new growth driver that is not currently obvious.

Why the Pain is Just Beginning

The video surveillance business has long sales cycle - it is a fact of the business. Short deals take a few quarters, long deals take a few years. Generally, money must be budgeted a year in advance or worse funds need to be found over multiple years. And once projects are started, they can take many months to completion.

There is a negative and a positive side to this element. The positive side is that 2009 is not as bad as it could be because lots of projects are already funded and many projects are in progress.  The big downside is what happens for 2010 budgeting. Lots of people report that current budgets are not being cut but it's almost impossible to not see heavy budget cuts come for 2010.

Even if security was on par with other business units, cuts are coming across the board and will only increase as the economic crisis deepens throughout the year. What's more problematic is that security is not on par with other business units (in most organizations). Security is often the first to be cut because of the common refrain about security being a cost center.

The problem is multiplied: (a) declining economy, (b) general budget cuts for future projects and (c) more pressure on cost centers like security.

The Crime Wave Will Not Save Video Surveillance

Let's assume that crime increases - theft increases dramatically, riots break out in the streets, etc. The reaction will differ by country and it's not at all clear to me how bad crime will get. However, simply assuming really high levels of crime can help illuminate some key points.

If crime breaks out, it invariably will be a response to high unemployment and declining economic conditions. This means businesses will be at high risk for bankruptcy and governments will be dealing with deep budget shortfalls.

While I do think this will lead to spending on video surveillance equipment, two aspects mitigate the eventual benefit this has for the industry:

  • With high unemployment and violent crime, security guards are the best response (cameras won't stop violence) and will be relatively inexpensive to hire.
  • Struggling businesses will buy video surveillance but will be under pressure to buy the least amount possible and the most inexpensive. This may be good for budget providers, but will be of limited benefit for the premium market leaders like Axis and Milestone.

Even assuming very high crime, there are important factors that might limit its usefulness to the industry.

Planning for the Next 18 Months

All business either implicitly or explicitly base their plans on assumptions on the general economy. Most video surveillance businesses assume the economy will recover in the next 6 - 12 months and we will return to conditions similar to 2007.

I recommend you do not make this assumption. Assume the downward pressures will accelerate over the next 12 months and that the next few years will provide minimal support for broad growth.

You should be especially careful about sales assumptions and expansion plans. Sales numbers are likely to repeatedly dissapoint as broader economic forces constrain new projects. Similarly, expansion plans may not produce immediately strong returns

Companies can still be successful yet they should carefully consider longer and deeper negative forces to contend with.

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