Published In August 2000
The $15 billion security industry is a global power that continues to draw interest from investors in the United States and abroad. Everybody wants a piece of this proverbial pie. Many are lured to the industry by a recurring stream of income from monitoring. Being able to create monthly recurring revenue generated by monitored accounts is an important difference between the security industry and many of those in the electrical contracting trades. Some in the industry build their own central monitoring stations and monitor customer accounts. More, however, contract these accounts to third-party monitoring stations, fully realizing the capital-intensive endeavor of building and maintaining an Underwriters Laboratories-listed, Factory Mutual-approved central station. Still others sell their accounts outright for cash, a move considered questionable by some critics in the industry. To the casual observer, the industry may seem stagnant and consistent, even hard-pressed for progress. To those inside, it has been the place for turmoil and extensive change and innovation. Manufacturers and installing companies have come and gone. Technologies have advanced. The competition has a new face, and by all rights it could be the electrical contractor. Let’s be honest. The security industry is a tough nut to crack. That doesn’t mean it isn’t and can’t be as attractive as any well-run entrepreneurial endeavor. But you first have to understand the nature of this beast called security. Beauty and the Beast Nearly every type of premise can benefit from some sort of security. Some electrical contractors have dabbled in security, or found niches in other low-voltage or limited-energy disciplines in residential, commercial, industrial, and institutional markets. With so many choices, finding the right niche becomes a formidable task at the least. Most electrical contractors tread lightly to test the waters. Steve Chilton, executive vice president of Cache Valley Electric Co. in Salt Lake City, Utah, said the privately held company makes telecommunications work––including telephones, computers, network wiring, and fiber optics––its main focus. “We started to work in the telecommunications niche after the break up of the Bell companies around 1988,” he said. “We trained our own people with the help of manufacturers and suppliers. We have a saying here: ‘To be a 21st century electrical contractor, you have to do low voltage and telecommunications.’” Today, Cache Valley has 140 employees in its tele-data division of the business. “It’s a different customer than what electrical contractors may be accustomed to,” he said. “When you do telecommunications, you’re working with information technology people who are experts, and the owners of the business as well. And, the stakes are high. If their communications network fails, you’re in trouble.” Chilton, a NECA Limited Energy Systems Task Force member, said there are more and more opportunities for those in the industry. Where to start There’s certainly no shortage of security products or niches. For instance, there’s traditional security and intrusion detection. These systems may be local; that is, they sound a siren or other noisemaker at the protected premises. Or, they may be monitored, in which case a signal is sent primarily over the regular switched telephone network via digital communications to a central monitoring station, owned by the alarm company or contracted to a third party. There’s also electronic access control, closed-circuit television (CCTV) surveillance and communications, integrated systems, fire protection and controls, locks, voice/data/video (VDV) communications, home and building controls, and automation. It’s no wonder some balk at the industry, missing all it has to offer. It is complex. You have to be well-versed in its nuances, space detection and other engineering principles, and the ever-changing computer and microprocessor technology. You have to get to know the manufacturers, what they offer, and how their products and services may fit your customer base. Initially, the task can be formidable. You have to learn about a new product, which is constantly being refined and redeveloped. Then, you have to find qualified workers, and it doesn’t end there. Two centuries of progress It all began as early as the 1800s. People wanted protection for their homes and properties, and the security alarm industry was born. With greater consumer awareness, innovations in technology, and the emergence of professional installing companies specializing in this low-voltage field, the business grew in leaps and bounds in the ’70s up to the present. Many important phases contributed to the growth of the low-voltage industry. Some of the most notable include: The invention of the McCulloh loop circuit for alarm signaling in the late 1800s; The founding of Homes Electric Protective in 1857, Morse Signal Devices in 1928, and Alarm Device Manufacturing Co. (Ademco) in 1929. Holmes was the first alarm company and central station monitoring firm on record in the industry; The development of an early type of microwave sensor in 1956; introduction of wireless or radio-operated alarms and closed-circuit television in the 1960s. Also in the ’60s, digital dialers, passive infrared sensors, and multiplex signal transmission technology; The breakup of AT&T and its divestiture of companies in the famous Consent Decree in 1984 and subsequent creation of the seven Bell operating companies; The introduction of mass-marketed, low-cost alarm systems to the industry by Brink’s Home Security in Dallas in 1984, setting the stage for dozens of imitators to follow in years to come; and The ’90s, with acquisition fever at an all-time high by both manufacturers and security installing companies, large and small. For some, the security alarm industry may seem unpredictable, even quirky. Many of its participants are closed-mouthed and wary of outsiders. Companies that have been in the industry for decades still dominate it. The security industry is comprised of a wide variety of installing companies that may be independent or owned by a larger entity. They range from the small one- and two-person operations to corporations with thousands of employees. Most electronic security companies are privately held, so they don’t have to release financial information. Notable public companies include ADT Security Services, AFA Protective Systems Inc., Edison Security Services, which bought the residential division of the Westec Security Group in 1998, Brink’s Home Security, SecurityLink from Ameritech, and others. Traditional security alarm installers operate in different niches and are as diverse as those in the electrical contracting trades. Their areas of business include high-end residential; low-end residential; small commercial; large commercial; home systems; industrial and institutional, and others. Typically, they purchase products from security distributors, manufacturer-direct, or even through supply catalogs or the Internet’s World Wide Web. According to Security Distributing & Marketing magazine, a trade publication for alarm dealers and installers published by Cahners in Des Plaines, Ill., total 1999 revenues through dealers was reported as over $16 billion, with an adjusted gain over 1998 revenue of 9 percent. The SDM 2000 Profile of Revenue by Type Service puts residential sales/installation at $5 billion; nonresidential sales/ installation at $4 billion, monitoring and leasing at $3 billion, and service/maintenance at $2 billion, with the rest nearly split between home systems and other types of revenue. On the manufacturing side, the ‘90s have been characterized by mega-mergers. Honeywell purchased the Pittway Group early in 2000. Pittway also owns the following companies, which it has been acquiring in the last five years or so: Ademco Security Group, AlarmNet, Apex, FBII (Fire Burglary Instruments Inc.), First Alert, Javelin, Micro-Tec, Northern Computers, Zetron, Fire Control Instruments, Firelite, Notifier, MicroLite, Silent Knight, and System Sensor (BRK). Pittway also owns ADI (Ademco Distribution) and equity in computer security firm Cylink. The list of merged or acquired companies is nearly endless. For example, SLC Technologies owns Sentrol, Aritech, GBC, Kalatel, and Fiber Options. Napco own the Alarm Lock Division. The list goes on and on. Get on board Opportunities abound in the security industry. Today, wiring is what counts, and that’s where the electrical contractor comes in. Turnkey is a word your customers want to hear. Integrated systems are hot, and service and maintenance are nice additions to the total package. “Electrical contractors have an opportunity to capitalize on their wiring skills,” said Duane Paulson, vice president of marketing for Interactive Technologies Inc., in North St. Paul, Minn. “Customers want one-stop shopping, and turnkey installations are becoming more and more common. Wireless technology is growing fastest, for the sake of customer convenience.” Simplex Time Recorder Co., Gardner, Mass., also sees the strength inherent in the electrical contractor market and low-voltage and fire system installations. “Increasingly, electrical contractors are involved in the design-build process of an installation,” said Carmen Romeo, director of electrical contractor segment marketing. This may not have been the case in the past. He comments that a large percentage of electrical contractors were pulled into the industry to package a system for a business owner. Most agree wiring is the “in” for the electrical contractor. “Bundled wiring systems are integral,” said Gordon Hope, vice president of marketing, Ademco Security Group, Syosset, N.Y. “Growth will be in the structured wiring systems, especially the installation of Cat 5 and other wires such as coaxial and cables and connections used to form a seamless network.” Find your specialization A conscious decision. The right plan. The right people. These are important ingredients for success in the security industry. “The low-voltage and security industries are highly specialized,” said Richard Potts, president of TEL-Vi Communications Inc. in Fenton, Mo., and member of NECA’s Limited Energy Systems Task Force. The company’s focus is VDV installations, but will do some security including electronic access control as dictated by the customer. “We only do about 10 to 15 percent security but it could be much more,” he added. “We have purposely kept the growth controlled in that area, and focused our business on communications. Security is really a specialty. The best way for a contractor to be successful at it is to bring in a specialist and grow from there. We had other opportunities, and chose to grow the business this way.” Potts, whose company was founded in 1976, moved into the communications niche in the mid-1980s, when he saw an opportunity after the anti-trust breakup of the Bell operating companies. “We’ve experienced quite a bit of growth in this area. For example, we’re doing telephone central office work as well now. In our business, the people we had were well-suited to that and we fell into it naturally. Electrical contractors need to do the homework and have the right background and training before they enter the low-voltage or security industry,” he said. And they are interested in all it has to offer. Potts says a good indication was the success of the first “Voice/Data/Video Expo” in Las Vegas earlier this year. Sponsored by NECA/IBEW, more than 2,200 people attended to see products and attend various seminars. Some, such as McMillan Technology Inc., in San Francisco, have forged headfirst into security, making a conscious effort to secure this niche. Higher-end access control is a mainstay for this company, which also runs a separate division, an electrical contracting company called McMillan Electric to handle power and wiring. Training, education, and technical support from manufacturers are key to keeping pace with security industry technologies, said Mike Barbagelata, national project director. Finding a niche and specializing in it should be goal one. The goal that goes hand in hand with that is finding qualified technicians who are experts in their field.” Electrical contractors are finding their niche. In an exclusive survey conducted by Electrical Contractor magazine (see page 70), 80 percent of subscribers interviewed say they perform security work. Some 78 percent of contractors who do security work believe the business will grow over the next three to five years. Further, about two-thirds of those who are not performing security work agreed that the business will increase over the next three to five years, suggesting that many will view it as an opportunity for growth. Here’s what we can expect to see in low-voltage in the future: An increase in network wiring solutions for both residential and commercial customers; Continued emphasis on integrated systems solutions comprised of security, information and asset management, building automation, supervisory controls and more; Increased business for those who can “turnkey” a job, from design specification to installation to service, maintenance and upgrades; Proliferation and widespread use of wireless devices for commercial as well as residential environments; Addressable intelligent fire alarm systems with networking capabilities; Continued development and refinement of existing technologies, especially space protection devices and closed-circuit television surveillance and recording systems; Multi-functional and multi-use electronic access control and cards, and Continued standardization of communication protocols and products that lend themselves to integrate with a variety of different devices. The outlook is good, especially for those companies that work today to position themselves for the future. For example, Progressive Electric Inc. in Charleston, W.Va., got started in low-voltage disciplines so it could grow in its somewhat limited market area. “You have to be flexible,” said Ted Brady, president, “and demographics certainly matter.” Brady said when a customer requests specifications that might include CCTV, communications, and VDV, Progressive Electric makes it a point to deliver. “When there was a need, we went after it,” he said, recalling that the company first dabbled in limited-energy systems when a hospital needed a nurse call communications system as well as data networking. The company installs fiber optics, coaxial cable, Category 5 wiring, and other networking solutions for its customers. “I always say that our niche is flexibility,” Brady continued. “We do commercial, residential, and industrial accounts and have a service department. We do it all except outside line work.” Brady relies on manufacturers to learn about new equipment and to be trained. In the case of the fiber optics, he first rented equipment before purchasing expensive terminators and other tools. He said he also uses these providers’ marketing expertise to add an edge to his sales efforts. “It’s all a natural part of the business. A real growth area is telephone and computer networks.” Electrical contracting firms across the nation are already positioning themselves in the security marketplace. They are no longer bound to gain security work through a general contractor, but are increasingly specifying security in the design-build stage of both residential and commercial jobs. Security may not always be a large part of a job’s revenue, but it is essential to the systems package and to their future profitability. O’MARA is the president of DLO Communications, Inc., in Chicago. She can be reached at (773) 775-1816 or domara @flash.net.