False alarms, competition contribute to decline in monitoring revenues

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Friday, August 1, 2003

SAN JOSE, Calif. - Security monitoring remains a highly sensitive segment of the overall industry, and false alarms and the policies to address them around the country may be contributing to lower revenues, Frost & Sullivan analysts said in a recent report.

According to the National Burglar & Fire Alarm Association, consumers are responsible for 76 percent of all false alarms. Jim Hawkins, strategic account manager for Frost & Sullivan’s Industrial Group, said this high incidence of false alarms has caused problems for the alarm industry as well as for the law enforcement agencies that spend crucial time and resources on false dispatches.

“As a result, some local governments have imposed fines and penalties on subscribers or the alarm companies with high rates of false alarms,” he said. “These measures could cause a decline in demand for alarm monitoring.”

Hawkins said monitoring is a highly sensitive industry because of attrition of existing accounts or customer turnover. These factors combine to directly affect the bottom line of companies, particularly where commercial accounts are concerned.

“With commercial accounts demanding a higher monitoring fee, attrition of commercial accounts has a greater impact on the balance sheet,” Hawkins said.

As a result of attrition and turnover, competition for accounts between monitoring companies is fierce, Hawkins said, leading some companies to go so far as to subsidize installation of new systems in an attempt to lure contracts from competitors.

“The security industry experiences intense competition. In a bid to win more monitoring contracts, pricing schemes have increasingly been designed to attract new customers by subsidizing installation costs,” Hawkins said. “While the market indeed responded with increased demand, the strategy has invariably undercut the profitability of companies.”

These issues are among the findings in Frost & Sullivan’s U.S. Security Services Market report (see Stats on page 2), authored by Prianka Chopra and Deepak Shetty, senior analysts with the company.

Chopra said while increased competition, decreased prices in the monitoring space and false alarms have contributed to lower revenues for monitoring companies, there is no cause for alarm just yet.

“There has been some decline in monitoring revenues, especially when you compare the 2002 revenues versus 2001 revenues,” Chopra said. “However, monitoring continues to be a high profit margin business.”

To combat these lower revenues and decrease costs for alarm monitoring companies, Shetty said the industry is headed in the right direction to reverse the trend of false alarm ordinances.

“The industry has several efforts to reduce the incidence of false alarms, and the Central Station Alarm Association is formulating a verification standard to reduce false alarms,” he said. “So we could see a reduction in false alarms going forward, actually.”