A Healthy Security Industry Will Confidently Ride Out the Economic Storm in 2012

Traditionally this is the time for reflection on the past year and forecasting the trends over the next 12 months. 

Memoori’s annual report on the world’s Physical Security industry showed that in 2011, despite a troubled economic climate, it increased revenues and profitability whilst merger and acquisition surged by more than double in the last 2 years to $9.847 billion.

So the security industry looks like a safe port in the storm with 2 main factors contributing to its robustness. The first being the continued growth in emerging markets particularly Asia where they shrugged off the global economic downturn and the second is the growth in network video surveillance solutions.  The latter will certainly continue to increase its market share despite poor economic trading conditions in 2012 and the former likewise will increase their share. The question now on everyone’s mind is will the problem of sovereign debt in the Euro zone receive the political action necessary to solve it? The jury is still out on this one.

Our report showed that in the last quarter of 2011 growth in demand looked a little flaky with the dynamic companies delivering high tech products with a balanced exposure to emerging markets maintaining a solid performance and those with less innovative mainstream products being far less confident about the future. On the basis of this we forecast an annual growth of 2.4% down from an aggregate 4% in the previous 2 years. This time round the aftershock from the financial meltdown in 2008 has left us with less ammunition to fight off a recession and the public sector budget will be trimmed to help pay off the sovereign debt resulting in an almost certain decline or no growth in GDP in many developed countries. Even allowing for a decline in growth our forecast would be optimistic, if it were not for the fact that the industry is in a much healthier state with a product portfolio that can deliver more attractive opportunities for their clients to improve security and at the same time profit from it.

The only way to reduce the impact of poor economic trading conditions is to continue with the innovation programme of delivering more effective systems at lower prices. Now has to be the time to dig even deeper and increase all efforts in delivering against 5 developing and emerging technology trends that can drive up demand. Our report shows that this may be best achieved through merger and acquisition and alliance and these activities have in both volume and value terms increased significantly in the last 2 years.

Wireless technology is now getting traction with the highest penetration of wireless communication being in commercial and transportation verticals whilst banking & finance are still concerned that these security systems can be breached. Education and Health buildings look to be the next growth markets. The main drivers for the emergence of the wireless culture, staying mobile, reducing investment cost and improving productivity has got estate managers leveraging wireless throughout their organizations.

IP Network products whether for access control, intruder alarms but particularly for video surveillance grew rapidly in 2011 and they are believed to be on the verge of a long and strong run. Falling IP prices together with much easier to install products and improved performance have all conspired to increase the Return On Investment (ROI) and total cost of ownership of this fast growing technology.

MSaaS & VSaaS is becoming an attractive solution to the physical security industry for it delivers a lower point cost, because providers can host multiple customers on a shared infrastructure. The Cloud economies of scale and flexibility also offer both the user and supplier a better deal. The prevalence of broadband along with 3G and 4G connections is making video accessibility easier than ever. So we expect the market will be looking up to the cloud to provide further cover.

Video Analytics is the segment of the market that appears to be the laggard. In 2010 there was a distinct lack of new products coming to market. This year was more promising with more developments. It remains to be seen if the patience of the investors will continue long enough for them to succeed and / or if a new generation of companies enters the fray.

In the last 18 months there has been a rapid rise in demand for both Physical Security Information Management, (PSIM), and Physical Identity and Access Management, (PIAM), systems.

Both are examples of emerging software solutions that are designed to remove inefficiency and manual process within security operations. Physical Identity and Access Management (PIAM) enable common policy, workflow, approval, compliance automation and life cycle management of the identity / badge holder across disparate physical security systems.  PIAM solutions offer operational cost reductions that can be delivered through this platform providing a bridge between the disparate systems without stripping out and starting again. PIAM is currently getting a lot of exposure. We are now seeing the emergence of PIAM to join together with PSIM to drive strategic and operational value for physical security departments in large operations.

All of these technologies embrace a wide divergence of skills and expertise and clearly it will require large research and development budgets to take them forward. It is unlikely that any one company in the security industry will master them all.

One thing is for sure, the security industry is going to ride out this turbulence because it is in a healthy state and has the confidence that in has overcome financial turbulence before.

Smart Grid M&A Activity & Value Forecast to Decrease in 2012.

One of the most encouraging findings from Memoor’s annual report “The Smart Grid Business 2011 to 2016” is that in the space of 5 years M&A have grown from $134 million in 2007 to $10.6 billion in 2011. Both the growth and now scale indicate the supply side is gearing up to meet the requirements for new technology and forecast demand for pure Smart Grid products and systems that could be worth a cumulative $2,000 billion over the next 20 years. 

However M&A activity slowed down in the last quarter of 2011 along with strategic alliance announcements. The decline in activity is hardly surprising given that the sovereign debt crisis in Europe started to hit financial markets in August and liquidity and confidence has since seriously deteriorated. M&A activity across virtually all manufacturing industries has yet to recover from its fall in 2008. 

Analysis of the M&A statistics shows that both the volume and value grew rapidly reaching 68 deals in 2010 having an average value of $155 million, whilst in 2011 some 49 deals had an average value of $225m. It also shows that cash financed up to 90% of the purchase price up to 2009 but this has fallen to an average of 70% in the last 2 years. Private Equity and Venture Capital companies have contributed little; IPO’s that the experts forecast would burst onto the scene in 2011 have fizzled out as valuations fell.

Forecast of M&A Business to 2016

Whilst the factors driving the massive growth in this fledgling business require restructuring and consolidation, confidence in the future has taken a hit. This negative economic outlook is likely to counteract some otherwise strong drivers for deal making in the Smart Grid business. As a result we have forecast that the value of deals will fall over the next 3 years and will not return to 2011 levels until 2015, and will then continue its upward growth, being worth $12.23 billion by 2016.

IT & Communications Companies Move into the Smart Grid Space

Smart Grid badly needs the IT & Communications Companies technical expertise in collecting and analyzing the vast quantity of data that will be produced. In addition ICT companies have their eye on the Internet of Things (IoT) and this is why they have entered the Smart Grid space.

In 2010 the IT & Communications companies made their first forays into the Smart Grid space. In September 2010 Cisco completed its acquisition of privately held Arch Rock Corporation, a pioneer in IP based wireless network technology for Smart Grid applications. Based in San Francisco, Arch Rock should accelerate Cisco's ability to facilitate the utility industry's transition to an open and interoperable Smart Grid by enabling Cisco to offer a comprehensive and highly secure advanced metering infrastructure (AMI) solution that is fully IP and open standards based.

In September 2010 ESCO Technologies acquired Xtensible Solutions, the thought leader in Enterprise Information Management Strategy, and a leading provider of semantic based information management and integration solutions to the utility industry worldwide. Xtensible will be included as part of ESCO's Utility Solutions Group and will be closely aligned with Aclara Software in providing best-in-class software services and products. ECSO is a proven supplier of special purpose utility solutions for electric, gas and water utilities; including hardware and software to support advanced metering applications and fully automated intelligent instrumentation.

In 2011, the number of external strategic deals declined slightly to take an 18% share but it included several large deals. In January 2011 Qualcomm acquired Atheros for $3.1 billion. Atheros is a leader in innovative technologies for wireless and wired local area connectivity in the computing, networking and consumer electronics industries. The acquisition is intended to help accelerate the expansion of Qualcomm's technologies and platforms to new businesses beyond cellular and provide access to significant new growth opportunities including Smart Grid.

Alliance & Strategic Partnerships

One of the strong features of the Smart Grid supply business is the activity in forming alliances and partnerships. In 2010 we identified 115 as opposed to 97 in 2011.

All of the major Smart Grid suppliers have made a number of alliances with different companies; the main objective being inter-operability of their products and solutions.

These alliances involve some of the worlds’ leading suppliers of IT & Communications hardware and software companies with the worlds’ major Electrical Transmission and Distribution Suppliers to bring about a common operating platform to communicate information and make it actionable. These alliances will undoubtedly play a major part in the development of the Smart Grid business over the next 10 years. In addition it could bring about the forging of some major Mergers and Acquisitions between these partners.

Smart Grid in Smart Buildings Looking To Outperform Utility Smart Grid In Growth & ROI

Memoori’s annual report The Smart Grid Business 2011 to 2016 shows that some 40% of the worlds annual spend on Electrical Transmission and Distribution Equipment goes to the Industrial and Commercial markets. It’s therefore not surprising that whilst the main body of the industry preoccupies itself with the utility market the traditional manufacturers are also targeting the industrial and commercial business.

Some 15 years ago they started to quietly investigate how they could meet the Industrial and Commercial client’s need for a more secure efficient and better quality electrical supply. This market was being badly served by the Utility companies in a number of countries through delivering “dirty power” which was causing outage problems to their internal electrical network. 

In the case of commercial and industrial buildings such as hospitals, data centers, banks, pharmaceutical, general process and assembly plants; constant electrical power is absolutely critical to their operation. The solution was to overlay intelligent controls across the network to monitor and control it. 

Since then these suppliers have interfaced the “internal smart grids” to the Building Management System (BMS) providing their clients further security and efficiency gains and a reduced energy bill. In the case where they generate their own power through a micro-grid they can balance out supply and demand and sell their surplus power. These operations are now installing VRS which they can deliver to the grid at very attractive feed in tariffs and gain significantly more revenue.

Some of the suppliers including Schneider Electric, Siemens, Honeywell and Johnson Controls are delivering these packages as part of a “Total Energy Management Solution”, whereby they invest their money in the controls and energy saving equipment, manage and maintain the plant and get paid from the guaranteed reduction in energy consumption. Recently they have taken the service a stage further by taking responsibility for buying the energy and to this end they have recently acquired companies that buy and sell energy.


But the opportunity to expand this business does not stop there. For as the report shows they are now in a strong position to take advantage of aggregating the output from these contracts through Virtual Power Plants (VPP). They can join up these distributed generation plants through the Internet. Collectively they present a better commercial proposition for supplying electrical power to the Smart Grid and generate higher unit revenues.

This looks like a very attractive business model which offers a better return on investment and has fewer road blocks than Smart Grid for the utility market at this time. Unlike the utility market which so far is taking a step by step development, a holistic solution is both practical and affordable in the industrial and commercial markets. It provides the benefits of distributed generation, giving a more flexible power delivery and reduces energy consumption on the site. Through “cloud based” hosted services other value add services can and no doubt will be supplied 

At this time the “Total Energy Management Solution” service is purchased purely on the basis of the building owner getting a satisfactory ROI, but in some countries CO2 reduction can now be traded, that provides an additional incentive to interface Building Energy Management Systems with the internal and external Smart Grid.

Smart Grid may have to Pay for its Limited Horizons

Memoori’s new report The Smart Grid Business in 2011 to 2016 shows that the step by step approach to developing the Smart Grid applied in the last 5 years is flawed.


What would Leonardo Da Vinci Have Done?
When Leonardo Da Vinci was obliged to finish off his first version of “Virgin of the Rocks” some 25 after being first commissioned, forensic evidence now shows that he totally rebuilt the framework of the painting which then allowed him to incorporate all the technical improvements of light, shade, expression and beauty that he had since mastered. No simple refining of minor details which is all he was paid to do; but a complete retrofit that is now some 528 years later one of the world’s finest paintings.
We are now faced with restoring an outdated and inefficient electrical grid and a supreme challenge to provide a one that meets the needs for a low carbon economy. Do we now rebuild the framework in order to achieve this? Or do we play around at the edge and go for incremental improvement hoping that it can be seamlessly joined together later? Sadly we are going for the later option in most regions of the world.

We are investing where the quickest ROI can be achieved commensurate with lowest technical risk and that in most cases is putting maximum investment in Smart Meters.

We have the opportunity to rebuild the framework with the latest digital communications, control technology and analytical software; producing an Internet of Things (IOT) and test this out at full scale. Had the Da Vinci mindset been applied some 5 years ago we now would have been close to a total solution that could be transferred around the world. Yes we are working on it now, but its well behind where it should be today.
Should we be surprised that this solution was not adopted? Possibly not. Faced with a $2,000 billion investment this was always going to be influenced by eco-political matters, restricted by existing regulatory frameworks and a need to drastically change the architecture of the grid. These are formidable barriers to overcome in order to deliver a truly Smart Grid.

Our report The Smart Grid Business in 2011 to 2016 clearly shows that the breakdown of investment so far is heavily biased to Smart Meters, currently taking by far the largest single segment spend in the Smart Grid business in almost all countries in the world. The spend on Smart Meters over the next 20 year period will be approximately $194 billion representing approximately 9% of the total budget and will reach its maximum peak by 2014. The latent potential for AMI complete with Smart Meters amounts to approximately 9%; while current sales took almost 40% of the pure Smart Grid market in 2010.
The prime reason that smart meters have run away with the investment dollars is that they are considered by the utilities as a relatively safe bet to provide a return on their investment. However the basic grid topology was built on stand-alone facilities offering limited, if any, interactive networked intelligence and this is a more expensive and technically demanding challenge for Smart Grid and will require an investment of some $1,620 billion and is running some 10 years behind Smart Meter penetration.
This will mean that the full benefit of AMI will not be realized well after it has been installed, but more importantly it would appear that progress has been held back on other vitally important issues. Insufficient attention has been given to developing open communication standards and delivering a solution for protecting the grid from cyber attack.

About the Report
Memoori’s report The Smart Grid Business 2011 to 2016 is a definitive resource for Smart Grid market research, uniquely combining clearly defined market sizing statistics with financial analysis of M&A, investment and alliances.
At 182 pages with over 23 charts and tables, The Smart Grid Business 2011 to 2016 report filters out important conclusions, supported with facts, as to what is shaping the future of the Smart Grid industry. The report contains key information for all those managing, operating and investing in Smart Grid companies around the world. You can learn more at the reports website; http://memoori.com/smartgrid-2012

Future Investment In Smart Grid Will Dwarf Current Expenditure; But Where Will It Come From?

Happy New Year and Welcome to the first 2012 message of the Memoori Blog. Later this week we publish our Annual Report “The Smart Grid Business 2011 to 2016” and during the next 2 months we shall produce a series of posts taken from this study on the major issues and challenges facing the industry over the next 5 years.


Vast Sums of Money will need to be Invested – Will it be Available?

We estimate that to achieve full penetration of the world’s existing grid together with future extensions to 2030, will require an investment of some $2,000 billion on pure Smart Grid equipment at installed prices. There is no question about demand for Smart Grid, in the long term it is inevitable. But we believe that investment funds are the weakest link in the chain and could cause a slowing down in growth. This can be overcome if the utilities are allowed to recoup the investment over time by increasing their charges for electricity. This will be the solution in Europe but is unlikely to be politically acceptable in North America, despite the fact that prices there are less than half that of most European countries.

In the US according to figures published by the Edison Electric Institute, the Electric Utilities in 2010 had revenues of $371 billion producing a net income of $68 billion and a net after tax profit of $27 billion, whilst retained profit after dividend payments was $10 billion. Of this transmission and distribution is unlikely to have contributed more than 30%. Pure Smart Grid average annual expenditure in the US will need to run at $22 billion and should peak at around $35 billion in 2021. This simply cannot be achieved without a significant hike in the tariff rate which the regulators will be reluctant to authorize.

Utility companies are not the most profitable operations and they are going to need significant help with financing the development of the Smart Grid. In most countries the electricity grid needs refurbishing in any case, so additional expenditure will have to be found, or the basic requirement of electricity supply and reliability will not be satisfied; let alone the pressing need to reduce CO2 levels.

Government Funding Will Be Required

Smart Grid is part of the “Clean Tech” business and so far it has only received a relatively small sum of investment from private and public sources; compared with the largess heaped on other parts of the business. However under government programs in the USA alone some $4.5 billion has been awarded for investment in Smart Grid projects in the electrical utilities business. In addition at least 27 American Recovery and Reinvestment Act (ARRA) projects are being funded from the almost $5 billion allocated to the U.S. Department of Energy (DOE) for grid modernization projects.

Our market sizing figures show that the United States is currently the global leader in investment in Smart Grid. In view of the size of its generating capacity and electrical transmission system this should not be a surprise, but the smart grid stimulus programs have pump primed investment and played a major part in taking the US forward.

In Europe, finance has been made available through EU programs and some demonstration projects are being financed within member state initiatives but nothing on the scale of that provided in the US. In China, the state has orchestrated the program for the nationalized utilities to carry out a major program of investment, directly and indirectly they will finance it.

This industry will still need stimulus funds for some years if it is to continue developing at a fast pace and play its proper role in assisting with the delivery of a comprehensive green energy solution. But with so many countries around the world now looking to reduce public expenditure, government funding for Smart Grid is unlikely to go unscathed. IT & Communications companies would almost certainly be interested in joint collaboration with the utility industry on all aspects of the Internet of Things (IoT) and they have the funds to invest.

Much Improved ROI Will Stimulate Investment

Smart Grid will deliver a better return on investment than is currently realized in the utility industry; but this has yet to be proven in most sectors of the business because full scale tests and demonstrations have not yet been completed. The exception to this is Smart Meters. In the UK a typical smart sub metering installation in the commercial / industrial market will provide a return on investment in 10 to 14 months subject to enhanced capital allowances, allowing offset of the total cost of installation against corporation tax in year one.


In most countries smart meter installations in the residential market are being financed directly and indirectly by the building owners / occupiers without so far placing too much burden on the utility companies. In the US Smart Meters save consumers $60 to $180 per year, according to the Energy Information Administration for an outlay of $500. A recent DOE study showed that when consumers can track their energy usage through smart meters, their usage declines by as much as 15%. For the utilities smart meters provide value through automatic billing reducing costs and better management of cash flow. Full AMI will provide real time data to help balance out supply and demand and reduce wastage. Every unit of electricity saved at the point of usage will save 3 units at the generator set. As the volume of equipment rises, prices will fall and ROI will increase, conversely energy prices are almost certain to rise.

The Physical Security Industry Delivered A Stellar Performance in 2011 - Can It Continue to Defy Gravity in 2012?

Physical security business in 2012 will look to emerging markets, new technologies and M&A activity. In the last two years, the physical security industry has given nothing short of a stellar performance. While it will continue to defy gravity in 2012, its performance will decline in some important measures.

Future Growth From Bric CountriesThe aftershock from the 2008 financial meltdown resulted in sovereign debt problems in Europe that are now receiving corrective actions. These will dampen future demand for physical security equipment right Europe, particularly in the public sector.


However, the industry was faced with an even more dire economic situation in 2008, but innovative companies did not cut R&D. Instead, they applied new technologies and developed more attractive products for clients. The industry is stronger and we are optimistic that demand will edge forward at a CAGR of 3.7 percent over the next five years. This will depend upon the emerging markets, particularly China and Asia, delivering higher growth rates.


Figure 1 compares the product sales revenues per capita in four regions against the GDP per capita. This shows the penetration of physical security systems in China and Asia is more than one order of magnitude smaller, while economic growth is at least three times faster than the developed economies of North America and Europe. The BRIC countries - Brazil, India Russia and China - will play a major role in keeping demand growing and increase their market share.



New TechnologiesFive emerging technologies have created new business opportunities. They are wireless communicat ions , IP networking technology, video surveillance as a service (VSaaS), managed video, analytics software and security management software, including physical security information management (PSIM) and physical identity and access management (PIAM). The opportunity for these technologies to create new business opportunities is enormous, led by IP networking technology. There is a good number of medium-sized companies, particularly in video, that have developed cutting-edge products and gained market share.


Consolidation And Organic GrowthM&A activity has grown at a compound annual rate of 12.5 percent over the last 10 years. During this time it has peaked and declined twice, doubling value during the last three years to reach its historic peak in 2011 of US$9.847 billion. We forecast the value of deals will decline by 2.5 percent in 2012, despite the fact that the security market will grow by a similar amount, thanks to buoyant markets in the BRIC countries.


In the last three years, the volume of deals has only increased by 7 percent but the value has more than doubled, thanks to a few large deals worth more than $1 billion combined. The two trends in the exit valuation figures is that software and biometric suppliers, together with alarm monitoring companies, have achieved the highest valuations in 2011.


The  Majors Review Future StrategiesThe major multinational leaders have used merger and acquisition as an important part of growing their business. It is therefore surprising that they have almost abandoned this policy in the last two years. There are a number of reasons why, but current exit valuations is not one of them, because they are still well below 2006-07 levels.


Most have positioned themselves toward the systems business. This has not required major investment and feeds off their heritage estate business, integrating from other parts of their organization such as fire detection, evacuation, mass notification and energy management. We expect them to extend their interest in PSIM and PIAM software to deliver system differentiation in the integration business. One potential market is outsourcing security services, as a result of reduced budgets in the public sector. Through PSIM, PIAM and MVaaS, they would have the ultimate service to offer, with little competition from the smart innovative product manufacturers.


Investment Business And SecurityAt the start of 2011, the investment business expected to return to normal. By September, confidence had drained. If the current volatility in world stock markets is short-lived, then the backlog of IPOs will go ahead. A repeat of 2008 when the IPO window closed down completely would have serious consequences for the venture capital industry and their recipients in security. In the first eight months of 2011, only seven announcements of capital injections were made in security, amounting to $85 million. Most of these involved investment in US companies by US venture capitalists.


Financing is available but there are plenty of high-tech businesses chasing it. In the present climate, it is unlikely the security industry will receive more than it did in the last two years. However, established companies renegotiated debt financing in 2010. This continued in the first seven months of 2011, with five lines of credit negotiated for $1.4 billion. All have been secured by alarm and home automation installation and monitoring companies in the U.S. Two confirmed the funds will be used for acquisition purposes. Goldman Sachs Specialty Lending Group made a $565 million line of credit to APX Alarm, now renamed Vivint.


Few venture capital companies specialize in physical security, as it is not the most attractive technology sector. However there are segments that are particularly attractive: information security, identity and security solutions, and analytical software.


Despite economic problems, the market will continue to grow in 2012. Growth will depend on geographic regions and IP networking. Financing will become harder to obtain, causing hardships to small- and medium-sized companies unable to deliver ROI that clients demand. 

3rd Annual Smart Grid Summit 2012

The 3rd Annual Smart Grid Summit 2012 will bring together Europe’s leading electricity grid distribution specialists, investors and regulators to share insights into the immediate challenges and projects now started to realise the Smart Grid vision. 

www.thesmartgridsummit.com

Dates: 24 – 25 January 2012

Location: Grand Hôtel Stockholm, Sweden

With the Energy 2020 strategy driving the move towards competitive, sustainable and secure energy throughout Europe, the Smart Grid Summit 2012 provides invaluable insights into the most important projects, research and developments making Europe a world leader in energy technology and innovation.

Now in its third year Smart Grids Summit 2012 features case studies and key note conference sessions over two days on areas including:


* Realising all the smart grid and smart home concepts in one city
* Advanced metering rollout and the benefits of customer energy management
* Utilising excessive data with real time data management software
* Building a more reliable grid by integration of decentralised renewable energy
* Boosting technological leadership
* Photovoltaic proliferation and grid connection issues
* Electric Vehicles and linking them to the grid
* Investing in smart grids - reducing costs and risks associated with smart grid implementation using effective data analysis.

Highlights from the Programme include:

Stockholm Royal Seaport Case Study

Thomas Wall, Head of R&D, Fortum will provide a full profile and analysis of the Stockholm Royal Seaport project. He will describe the lifecycle of the smart project as well as how to achieve effective leadership and successful partnerships to realise a smart grid for a smart city.

The Importance of International Partnerships to the Smart Grid
Lord Stephen Green, Minister of State for Trade and Investment, UK Government, will be identifying the challenges that utilities throughout Europe are facing as they look for the right partners to build, maintain and supply their grids. He will reveal how utilities, smart companies and government can work together to forward grid development in order to move towards the 20-20-20 targets and a pan-European integrated energy market and infrastructure.

Interoperability – Developing the Common Technical Standards that will Connect the Grid
Richard Schomberg, Vice-president of Research EDF International, EDF Group, will reveal the urgency of the development of consensus build standards as utilities, equipment manufacturers and others try to integrate all of the different pieces of the smart grid puzzle into a common architecture.

The Virtual Power Plant

Jonas Maltha Rasmussen, Head of Distribution & Commercial Ventures, DONG Energy will conduct a technical presentation on integrating demand response, distributed generation and energy storage. He will provide insights into his current work which focuses on replacing the classic linear structure of power with a mix of generation, transmission and distribution connections that make up the virtual power plant

"A total overview of all the changes we have in the next ten years." 

Senior Advisor CR, Enexis

"Useful introduction to issues / challenges facing Smart Grid innovation and development." Operations Systems Support Manager, ESB Networks

"A clear snapshot of Smart Grid Technology." 

Project Manager, ENDESA