AT&T enters security market, but can it become a billion-dollar business?

DALLAS—When AT&T announced on Monday that it will begin trials this summer of Digital Life, its home security/home automation service, here and in Atlanta, mainstream newspapers reported that the company was looking to potentially grow the service into a $1 billion business.

Can the telecom giant do that? How long will it take?

Security Systems News put that question to Michael Barnes, a partner in the consulting and advisory firm Barnes Associates, which specializes in the security alarm industry and co-sponsors the Barnes Buchanan Conference.

AT&T will find that goal challenging, Barnes said, but an acquisition—especially if it's an acquisition of the largest player in the home security industry, ADT—would give AT&T instant scale.

“AT&T will also have the same accounting and scale-related challenges that other large MSOs entering the space have faced,” Barnes said. “First, as is well known by virtually every security alarm company in the business that uses an internal sales model, it is not easy to show earnings or cash flow, particularly during periods of high growth. Too much of the cost to originate customers has to be expensed rather than capitalized.”

He noted that while value is created, it is not easily reflected in the financials.

Gaining scale in the security industry is not an easy task, and if you're AT&T, your idea of big is really big.

Consider companies that have grown very quickly. An obvious example is Vivint, a summer-model company that has grown to 600,000 customers in about six years. That is astounding growth in the security industry, Barnes said, but “that level of growth, or even a multiple of it, is not likely to ring the bell at AT&T … especially if the effort does not contribute to earnings.”

Barnes advises keeping an eye on what happens to ADT when it is spun out of Tyco this fall.

“Change the 'D' to a 'T' and add an ampersand, and all of a sudden you have some scale,” Barnes said. “That would be a strong commitment to the industry, and in many ways consistent with the pattern we have seen before from large players.”

Will AT&T be successful in the security industry? “There is no question they will have success, at least by the security alarm industry's standard,” Barnes said.

AT&T's brand name, large existing customer base and suite of services will be appealing.

Barnes said he believes “there is still an argument that the industry's traditional players will successfully position themselves as specialists, and define their services as appropriately purchased outside of the broader 'digital life.'''

That said, Barnes added this caveat: “As we advised when Comcast entered the business, it might be a good idea for existing players to put some AT&T stock in their retirement portfolio as a hedge.”

Asked about speculation of an acquisition of ADT by AT&T, Paul Fitzhenry, VP Corporate Communications Tyco International, told SSN: "As a matter of policy, we do not comment on market rumors or speculation."

AT&T did not return Security Systems News' calls or emails seeking comment on the Digital Life program.